A popular advice on Wall Street and amongst investment advisors is to ask you to stay invested in the stock market, through thick and think, in order to reap the benefits and returns of the long term upward pull of the economy. This thesis has two fundamental underpinnings - first, so long as you have political stability and a favorable business environment, human effort is going to continually improve the nation or world's economic standards, and the stock market will reflect that; and second, from a market specific angle, no one can accurately predict the exact up days and down days for the market, and any attempt to time these typically results in the investor missing out on most of the upside movement. The net recommendation being to stay invested to at least get the net benefit of the upward thrust in the economy.

This thesis is generally strong, provided we add a few caveats:

1. While it is true that the major thrust for an economy that is politically stable and business friendly is upwards, this is a very broad upward thrust that will also periodically suffer long periods of downward push due to periods of overinvestment and underinvestment in certain parts of the economy. Recessions are useful to correct these over and under investments, but the stock market is not a patient being - it will drop prices to quickly reflect this downward thrust. During periods of extreme imbalances in the economy, the correction will be equally severe and or prolonged. In other words, given that the typical maximum investment period of an investor is between 30-40 years, the investor is likely to see several such downward thrusts. Of course, if in the process, the economic environment becomes progressively less friendly to business - the stock market may become more permanently depressed, adjusting to the new realities.
2. Investment style must dictate whether you stay continuously invested or not - most investment thesis have a life of 3-5 years. That is, any business story/stock story will typically unfold during the course of that time period - failing which some new investment thesis must be picked and tracked. The only exception to this is a broad based portfolio that relies primarily on asset allocation across broad swaths of the stock and bond markets for its returns. The "Smartest Portfolio" is one such example of asset allocation.
3. Markets can be timed (sometimes!): While it is true that it is impossible to time the day to day movement in the stock market accurately, and that even short-term (a few weeks or a few months) movements are difficult to call, intermediate term trends (3-5 years) are possible to predict with some accuracy. Importantly, it is possible to react to these intermediate term trends and adjust your portfolio appropriately. Focusing on intermediate term trends can give you an excellent pointer about the stock market and help you get out of the market if this trend is pointing downward.

The only real case to stay permanently invested is if you are satisfied with risk-adjusted returns of 4-5% over an investment period of 20 years or so with a well asset-allocated portfolio, and generally hope that the political environment stays generally constant. This is not a bad bet at all!

Happy investing!