What should you do if you missed the market?

Maybe you sold stocks three years ago because you thought prices were “too high.” Maybe you’re cautious about money and feel happier with Treasuries or municipal bonds. Maybe you’re just now finding the money to invest.

And there, right under your nose, is your stock-happy neighbor, using his profits in Intel to buy a new BMW. Your friends are talking up stocks at parties and taking fabulous trips abroad.

You’re driving a Dodge and worried about how to pay for college in a couple of years. Grrrrr.

Here’s what not to do.

(1) Don’t kick yourself around.

During these years, your personal goals were defensive. For whatever reason, you couldn’t face or couldn’t afford to take a loss.

The fact that, in hindsight, you probably wouldn’t have had a loss is irrelevant. At the time you decided not to own stocks, there was no way to know.

Had the market gone down instead of up, your friends would now be feeling the sharp bite of regret. You’d be talking up Treasuries.

(2) Don’t blame your husband, wife, mother, boss, dog, accountant or parakeet.

No one’s to blame. People make decisions based on their best understanding of their personal finances at the time.

Between taking too little risk and taking too much, I’d choose “too little” every time. At least it preserves your capital, which gives you a chance to start again.

(3) Don’t eat your heart out over money you’ve “lost.”

Financial planner Mark Spangler of MFS Associates in Seattle says some of his clients are telling him, “If I’d had all my money in Microsoft, I’d have made 79 percent this year.”

Similarly, many people not in the market are irrationally angry or bitter about it. They have a “perceived loss,” although not a real one.

But playing the “if only” game is an emotional and financial box. Professional money managers miss opportunities every day. You need to address the next opportunity rather than mourn the one that got away.

Besides, it’s imprudent to put all your money in Microsoft, as its worshipers will learn someday. IBM was a brilliant stock for years, until the day it suddenly and shockingly wasn’t.

(4) Don’t jump into the market full force, in order to make up for what you missed.

Spangler says he’s hearing from people who want to invest all their money NOW, because they believe the market is going up, up, up.

Maybe so, maybe not. Before you invest, consider why you stayed out of the market in the first place.

If you’re working with money you’re going to need within three or four years, your decision was right. It shouldn’t be exposed to stocks. The market might fall and not recover by the time you need the cash.

If you have a lot of debt and small savings, you also shouldn’t be invested heavily in stocks. What if the market dropped around the time you lost your job? Stocks are for money you won’t have to touch in any plausible emergency.

If you left the market because you were playing at market timing trying to catch the price swings up and swings down you get no sympathy here. No one’s smart enough to time the market with consistency. I hate to say “I told you so” but, well, never mind.

If your job seems secure, however, your debt is low, you’re holding retirement money that you won’t need for many years and you still haven’t been in stocks, you’ve been overcautious.

Stock markets do indeed drop by 50 percent sometimes, or stay flat for a decade. But troubles like this are temporary, as history shows. As long as you’re in for the long term, some of your money should be committed to stocks.

To reinvest today, consider diversified mutual funds: an index fund invested in leading U.S. stocks, an international fund, and a fund that buys smaller companies.

Because of the U.S. market’s undeniably high valuation, reinvest slowly some money each month or each quarter. That might give you a better average price if the market zigzags or drops.

International stocks, however, have not done as well as the U.S. market. They can probably be bought all at once.

But don’t jump from unwarranted pessimism to unwarranted optimism. At some point, stocks are going to drop. Average returns since World War II are 12.3 percent. If you hold for the long term, that’s what you can hope to get.

Education subsidies

Whether the new education tax credits are as generous as they look is going to depend on what happens to student financial aid.

The credits take effect next year and are designed for families with middle incomes. They reduce your tax bill, dollar for dollar, by certain amounts that you pay for higher education.

But by lowering your taxes, these credits raise your after-tax income. Under current law, the higher your income, the less student aid you’re going to get.

So think of your tax credit as spare cash for college and put it away, rather than spending it on other things.

Student aid is generally based on your previous year’s income. The new credits will raise your after-tax income in 1998, so student aid won’t be affected until the 1999-2000 school year.

If applicants qualify for less aid, the colleges that dispense their own aid funds are going to be left with more money in the till. They may use it for other purposes or they may improve their current student-aid programs.

There are two new tax credits the HOPE Scholarship and Lifetime Learning.

The HOPE Scholarship Credit is available only for the first two years of school. For each student in the family, you get 100 percent of the first $1,000 you pay in tuition and fees and 50 percent of the second $1,000, for a total of $1,500.

HOPE students have to go to school at least half-time. You get the credit for expenses incurred after Jan. 1, 1998.

The new Lifetime Learning Credit is worth up to $1,000 a year (20 percent of the first $5,000 paid in tuition and fees) in 1998 through 2002. Starting in 2003, you get up to $2,000 (20 percent of the first $10,000 paid). Effective date: July 1, 1998.

But in any calendar year, a student can benefit from only one of the following three tax breaks: the HOPE credit, Lifetime Learning or the education IRA just authorized by Congress. The new education IRA, effective next year, lets you save an annual $500 in after-tax dollars for every child under 18, accumulate the money deferred, then withdraw it tax-free for higher education.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.