Basic Investing In A Down Market

While watching the stock market in free fall, a reader (Lily) writes in and asks about what to do with her 401(k):

My 401k is heavily invested in growth stock mutual funds (several different ones but all are growth stock oriented).

I’m wondering if it would be a good strategy to move a portion (25-50%) out of these growth funds into a money market fund and wait for the correction to be over before buying back in. I’m not talking about withdrawing from the 401k, just reallocating the money within it, so I can avoid the potential downside and buy back in closer to the bottom. Or I can just close my eyes and hang on, mentally preparing myself to see the decline in value and waiting patiently for it to begin to grow again.

If it matters, I’m in my 40’s, so I’ve got about 20 years before I plan to start withdrawals.

My philosophy is that the instant an investment makes you nervous, you should pull back into something safer. This is a very conservative approach, but it’s served me incredibly well so far.

I try very hard to avoid giving specific stock advice on here, but I will say that the stock market as a whole has me very nervous right now and I currently do not have a dime in stocks (excepting a small amount that I basically cannot move due to limited investing options, but that amount is in value stocks). Everything else I have in terms of investing is in real estate, bonds, or cash.

If I were Lila, I’d move everything into a money market account for a while and sit on it for at least three weeks, then wait until I started feeling confident about the stock market again – or at least until I felt it was close to the bottom, which I don’t think we’ll see for another year unless there are tremendous cuts in interest rates (this last bit is solely my opinion from having watched the stupidity of the housing market over the last few years).

Another bit of my opinion: if there’s ever been a time where you should focus on debt repayment instead of investing, this is it. Take this big market burp as a sign that you should clean up your own personal finances and get rid of outstanding debts. Pay off the credit cards, student loans, home equity loans, your mortgage, your automobiles. Spend the next several months getting rid of some debts, then start looking at investing again. I’d be shocked if the market were higher in six months than it is right now.

In short, there is no stock gain or stock loss worth a series of sleepless nights. If your investment is stressing you out, move it to something more conservative – you might not get the huge gains, but you won’t see losses, either, and you won’t be up at night checking news reports hoping for the best.

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  1. Allison says:

    woah wait – do you mean I should sell the mutual fund shares in my IRA (vanguard total stock market index)?? or should I just stop contributing right now?

  2. While I think sometimes you have to follow your gut and get out of investments when they make you nervous (and certainly if you are losing sleep over them), what you are essentially trying to do is time the market. You’ve already lost most of what you are going to lose in the stock, and if you just hold it there, it should go back up, as long as your stock holdings are relatively diversified. If you take it out now and wait for it to go back up before you invest it again, you’ll have lost that money from the gains it had while you were waiting to see if it was really time to put your money back in.

    However, as with all things financial, everyone has their own way of doing it! But for me, I try to move my money around as little as possible.

  3. jason says:

    Or… you could quit trying to time the market and continue investing using a dollar cost averaging approach.

    If you’ve got 20 years till retirement, quit watching the day to day movement of the market and think about the long haul.

  4. JP says:

    Hmmm…Speaking of the herd mentality…

    Right now people panicking and selling there stocks all across the country are exactly the reason why the market is down. If you were to follow the saying “Buy when there is blood in the streets, and sell when there is singing”, right now would be a perfect time to buy instead of selling. It’s sad but true, most of us let emotions ruin the gains we would have realized if we would just hold on to our positions and let it ride.

  5. Thanks! I’ve been wondering about this kind of thing myself. Just getting into it myself, so I haven’t really known what to do. I just posted my thoughts the other day, but this helps.

  6. Travis says:

    I disagree about moving money out of equity investments in to money market accounts. Like the previous poster said, you’re essentially trying to time the market in what should be a long term investment account. What about the possibility that you move investments in to a money market account today and stocks have their biggest rebound in years tomorrow? If you’re investing for the long term put the money in the market and ride out the ups and downs.

  7. guinness416 says:

    Market timing never seems to work out for the ordinary Joe/Jane. I suppose it depends if you contribute to the 401k with each paycheque or in lump sums … if it’s an every month thing, you’re dollar cost averaging anyway, and it’ll likely all shake out 20, 30 or 40 years from now when you retire. I agree about the sleepless nights comment – that’s why I only check my retirement accounts once very few months.

  8. Jamie says:

    I’m in (rare) disagreement here. Personally, I lean toward buy and hold with long term investments. My personal goal for retirement savings is that historic, 11-12% gain. I’ve accepted the fact that in any given month/year, I’ll be down or up.

    Perhaps this means that the writer wasn’t entirely comfortable with index funds (and their relative volatility) when she first bought in, and she’ll be more comfortable with bonds or money markets going forward.

    But, if you start to get skittish every time there is a correction (small or large), you’ll get burned with the fees and losses associated with trying to time the market. Where do you draw the line when determining to pull out? 3% correction? 5%? 10%? 15%? With 20yrs left to go, this will be just one blip on (hopefully) a gradual incline.

    Put that money away, and hold on for the ride. If it scares you, start to gradually reallocate to some other, more conservative investments. Just my 2 cents…

  9. Anand Shah says:

    I completely disagree. When do you think you should be buying stocks? When they continually march up? Falling stocks just means there is a sale going on. I don’t know about you but I would be loading up instead of selling.

    With that said, I subscribe to the theory that if you are not Warren Buffett or another investment genius, then the best method is dollar cost averaging and sticking with your asset management plan. You should stick with the plan during good and bad times.

    If you are uncomfortable with the plan, then you should first try to understand why you suddenly became uncomfortable with it. Then adjust the plan based on your over all risk profile (see vanguard’s site) and not because the market is going down or up.

  10. Jack says:

    My question would be, if your investment horizon is 20+ years why are you worrying what happens today? In 20 years this correction/bear-market/blip (whatever it turns out to be) will be inconsequential.

    I’m looking at 30+ years before retirement – and I try hard to *not* follow the markets day to day. Of course it’s difficult not to hear about this latest drop with all the news channels updating it minute by minute. When I do hear about things like this drop I try to see it in a positive light – as an opportunity to buy more shares for my dollar that will generate even more returns over the years.

    There are many studies showing the drawbacks of trying to time the market (which is what this is). We simply cannot predict where the market will go. If you’re trying to sell high and buy low, being off by even a few days (which you will be) can drastically cut your returns versus just regularly buying and holding your funds.

    My personal strategy is to have a diverse collection of low-cost index funds (foreign, small/mid/large caps). I look at my portfolio once a year and rebalance to my goal percentages. And I do my best to ignore the market :) If anything maybe you could think about diversifying into some value funds?

    Constant monitoring of the market used to be a problem for me and generated a lot of stress. I say ignore it and sleep well.

    Of course, that’s just my way of doing it.

  11. PJA says:

    So you have lost a few percentage points and are spooked (sell low) and will wait until the markets recover. You will really only know when it hits bottom *after* that has happened – usually at the next high (buy high). sell low, buy high? May I suggest you move it to a balanced mutual fund so you can sleep at night and take advantage of run ups (which are quick and easy to miss)?

  12. Lazy Man says:

    “if there’s ever been a time where you should focus on debt repayment instead of investing, this is it.” I love focusing on debt repayment, that’s never a bad plan. Sleeping well is great too.

    However, should people have been investing at Dow 14,000 last month and not Dow 12,700 today? That sounds backwards to me. I think it makes more sense to invest now than it did before. I upped my 401K contribution rate to buy cheaper stocks, however long it stays down. If it gets back up to 14,000 or 14,500, I will lower my contribution rate a bit and hope for pullback.

  13. Kim Isaac says:

    The stock market has always made me nervous and so my investments are very conservative. At this point I am focusing more on becoming debt free. I still invest a little but not as much as before. The interest from investments is less than the interest I pay on my debts.

  14. Matt says:

    Trent – Did you post earlier about moving all of your money out of stocks or is this the first mention of it? I read posts about you buying on some recent dips, but I don’t recall any posts about you selling everything.

    Are you keeping track of what your accounts would look like if you had kept the money in stocks? It would be interesting if we could see in a year or two whether your attempt at market timing paid off.

  15. Dan says:

    This is bad advice. “Listening to your gut,” so to speak, about matters of investing is a great way to lose money because human beings are really good at paying far too much attention to short-term news letting irrational considerations dominate their decisions. If Lily gets spooked every time the market goes down over the next twenty years and moves to a more conservative allocation, she’ll probably also get excited every time the market goes up and move to a more aggressive allocation–all moves which will happen at exactly the wrong point in the market’s motion.

    If you’re an investor in the stock market, the best strategy is to take a step back from your money, realize there will be losses as well as gains, understand that the long term direction of the market is upwards, and pursue the rational course: stick to your target asset allocation. Rebalance periodically if necessary. Do not let your emotions rule your decisions about your money; this will only cost you. Isn’t that really the entire point of The Simple Dollar anyways?

    If Lily (or any other reader) simply can’t stand to see her investments go down like in the current market, she should consider moving to a more conservative portfolio…permanently. You’re right about one thing, Trent: peace of mind is valuable. But it’s not priceless–the long term costs associated with irrational buying and selling in a portfolio too risky for comfort will almost certainly be higher than the long term costs of moving to a less risky portfolio all together.

  16. jtimberman says:

    A down market is a fantastic time to be buying mutual funds. That means they’re on SALE.

    The stock market has averaged about 12% rate of return over the last ~70 years, including the hit in the 70’s (which was almost as bad as the depression) and the dotcom bust. If you’ve got great mutual funds with long track records, feel safe. The people who run mutual funds have thousands of accountability partners that they’ll be able to manage that mountain of money well, otherwise they won’t be in business much longer.

    Beware any mutual fund with less than 5 year and if you’re very conservative, avoid any that hasn’t been around at least 10 or 15 years. There’s plenty of funds out there that have been around since the 50’s and 60’s.

  17. Amanda says:

    Woah! Down markets are “blue-light special” bargain hunting time. It’s time to buy folks & then hold as the market does what it always does..fluctuate! Unless every city in the U.S. has blown-up (& we certainly hope that never happens), I can’t fathom why I would be selling right now.

  18. imelda says:

    I thought that we were supposed to buy when the market was going down. Please excuse what is probably my ignorance, but isn’t now the time to be buying? When everything is going down?

    I thought that’s what you (and Ben Stein) said, the last time there was a dip in the market.

  19. rstlne says:

    I don’t think it was wise to be completely in stocks in the first place, even though that seems to be what almost everyone I’ve talked to does by default. There are many asset classes out there — cash, bonds, stocks, real estate, precious metals, commodities, foreign currencies — so get some of each and rebalance at regular intervals.

  20. Cindy says:

    Here’s a good example of where you are wrong:

    Say, at the start of 1987 you invest some money in a Dow-linked fund. Then on Oct 19, 1987 you panicked, and decided you were not comfortable with the market falling; you lost 9% on your investment. So you sold, and pulled everything out.

    If you had waited until the end of the year, you would have been UP 1.5%.

    And just like today… If you had freaked out when the Dow was down 340ish points and capitulated, you would have missed the end-of-the-day rally.

    Timing the stock market inside retirement funds for a non-professional is a fools errand. If you have a long time horizon, holding tight and slowly moving slowly towards conservative investments as you approach retirement is the way to go.

    Calm down, and turn off CNBC.

  21. Wendy says:

    I, too, have to voice a disagreement: what Trent is essentially suggesting is that you sell low and buy high- because a low market makes you uncomfortable and a high market makes you think you’re missing out.

    What you should do to alleviate those sleepless nights (assuming you already bought into the market at this point) is to educate yourself about that market. Remind yourself that a) you’re investing for the long term, so you know that you’ll see growth at least over the next 10 years or b)you knew when you went into the stock market for short term gains that it was a gamble, and this is just part of the game.

    I, for one, and going to continue to buy into my usual portfolio on my usual schedule and hope to take advantage of the current low costs. I know I can’t predict the bottom, so as much as I would like to put more money in now, I’m going to resist the urge.

  22. doink says:

    Just the opposite.

    The market’s having a sale.

    Increase your 401(k) contributions. Put it in a target retirement account. Ride the market to retirement.

    (I fully agree with you about debt repayments. Pay off debts first, no matter what the market looks like. Get that money cooking for you).

  23. laura k says:

    Whoa, what you’re recommending is buy high-sell low, a sure way to lose money (and that’s not taking fees into account)! Shouldn’t she be buying while the price is cheap?

    As for Lily’s question about getting out now and starting to invest again once the market has hit bottom, how is she going to know where the bottom is? By the time the average guy/gal on the street discovers that the market is going back up, it’s too late to get the best deals.

    I agree with guinness…invest regularly (e.g., monthly) and ride out the waves. If she’s really uncomfortable with her situation, she should review her investment strategy as a whole and re-allocate her portfolio so that it’s more conservative.

  24. Eric Falcao says:

    I disagree Trent. Now is the time to take advantage of dollar cost averaging and buy. If you have the foresight to exit equity markets before a drop, then more power to you, but the current correction has been steep enough that selling now is a big mistake. Ignore market timing.

  25. Dough Roller says:

    In my view, if losing 10% of an investment makes you nervous to the point of selling, you shouldn’t have invested in it in the first place. A market correction (i.e., loss of 10% or more) is a great time to truly understand you’re appetite for risk. I have 80% of my portfolio in stocks, and I have absolutely no intention of selling. I am also adding to stocks with each 401(k) contribution. Having been through market corrections before, I understand how I’ll react (which is to dislike them like everybody else, but not to sell). If these corrections are more than you can bear, you should reconsider your asset allocation. But whatever you do, don’t try to time the market. You’ll lose more often than you’ll win, in my opinion.

  26. Beth says:

    Don’t sell. I think that’s really not good advice. My retirement account dropped 50% in value in the 2000/2001 time frame – I don’t even remember exactly when it happened because I ignored it and kept investing. And it went back up. And it’s worth a lot more now, because I kept investing all along, rather than trying to time the market. (Didn’t Trent already do an article showing that’s pointless to try to time the market??)

    Take the long-term approach! Pick an asset allocation and stick with it.

  27. Jeremy says:

    Emotion should never play a roll in your investment decisions. You create a portfolio that is suited for your risk tolerance and you forget about it, only making minor changes to keep your allocation in check over time.

    If the market activity is causing you to lose sleep or feel uneasy, then you are simply invested inappropriately for your risk tolerance and you shouldn’t be invested how you are currently. Drastic decisions to move nearly completely in and out of equities/cash is a certain losing strategy for the long term.

  28. Rich says:

    A rare bit of less-than-stellar advice, here.

    In theory, I agree that investing should not make you nervous–so I understand with that aspect of the wisdom. But that’s more of a guide about how not to buy in, not when to get out. Don’t look around, decide things are going to hell and gone, and decide to cash out–that way layeth poor returns.

    If you need the money soon–well, you shouldn’t have had it all in stocks if you’re planning on using it shortly. But if, say, it’s for a far-off retirement? Don’t sweat it. Keep your contributions up, because there’s about to be a sale on stocks!

  29. guinness416 says:

    Whoa, that’s a unanimous comment section!

  30. Erin says:

    Read this article from a 2002 issue of Money to learn why investing on emotions or “your gut” is exactly the WRONG thing to do. http://money.cnn.com/magazines/moneymag/moneymag_archive/2002/10/01/328637/index.htm

  31. jb says:

    As the other posters have mentioned, THIS IS THE TIME TO BUY! I don’t know about you but I like to buy things when they’re cheaper rather than when they’re expensive. In general, when the news and markets are proclaiming doom and gloom, it’s a perfect time to get into the market.

  32. Ryan says:

    Yeah, there’s a good reason you don’t give stock advice on this website. It’s B-A-D. (Much love though, Trent, this site is great.)

    If investments make you nervous, you haven’t figured out an investment plan (when you’ll use the money, target asset allocation) or you don’t understand equity investment.

    Just as soon as you might pull out to avoid that 10% loss, the market could recover that 10% in a matter of weeks. By the time you’re comfortable again, you’ve missed the boat.

  33. Jake Smith says:

    I think this is the worst time to get out for people who are not looking to make a quick buck but are in for the long haul. Everyone recognizes that this “burp” is temperory – getting out now and buying back later when stocks are more expensive makes little sense. Unless you need your money in the short term, hang tight and enjoy the ride!

  34. lorax says:

    Didn’t I see a recommendation for buying into the S&P 500 here a couple months ago?

    PE ratios are falling now and that’s good! Assuming the E remains constant, now is a buying opportunity. Unfortunately, I think earnings targets will be re-issued downward, which will make this less of a deal, but stocks now are certainly a better deal than last month.

    On the other hand, if you have to “sell to the sleeping point”, fine. Just keep the asset allocation constant.

  35. Trent Trent says:

    Why are all of you deriding me when I basically agreed with you in the article? I told her that if she’s too nervous to invest in stocks, she shouldn’t be in stocks, period. If you can’t stand the volatility then you shouldn’t be in the kitchen. The point of the article is that if your investments keep you up at night, you need to move to something more conservative, period. This is not a time to buy if the idea of losses makes you sick to your stomach – in fact, it’s never a time to buy stocks if the idea of losses make you sick.

    The critics here are coming from their own perspectives and not actually reading what Lily wrote. She’s worried about her investment. If you’re worried about your investment, your portfolio is too aggressive for your risk tolerance and you need to scale back. Just because your risk tolerance tells you that this drop means “buy” doesn’t mean that’s the right answer for other people’s risk tolerance.

  36. Beth says:

    Respectfully, Trent, what you said was “the instant an investment makes you nervous, you should pull back into something safer” – and that seems like a knee-jerk behavior, destined to result in a lot of selling low and buying high. Emotions should be kept in check as much as possible when investing.

    Now, if her investments weren’t in alignment with her investment philosophy, that would be a reason to sell. If she doesn’t have an investment philosophy, she needs to develop one, and make her decisions from there.

    I haven’t looked at my investments. I check them quarterly and call it good. And I’ve just checked out the Bogleheads book and am working on defining my own investment philosophy. We’ll see if it results in any changes in my investments!

  37. Wendy says:

    When you restate yourself bluntly, Trent, I can re-read your article and see more closely what you mean. However, you quoted Lily as saying she would buy back in near the bottom, and you never addressed that comment specifically. By agreeing that she should get out of the market and not recommending that she stay out, it is harder to see the perspective from your comment in your article. Still, I would recommend that she learn more about the stock market to help her sleeplessness, rather than give up on it.

  38. kim says:

    I’m excited about this market. Even though I get a twinge of nausea each time I see the value of our 401k go down, I love to look at the difference in the number of shares we are purchasing each week. In the long run this dip will greatly benefit my family.

  39. Joe says:

    You did not tell us your time horizon, but let’s say you still have 20 years to invest, for example.
    If you selected your mutual funds as part of a diversification tactic, and they are “good” mutual funds, stay with them and keep investing in the down markets. Let’s say that it takes another 12 to 24 months to the bottom and that you lose 40% of what you have from the *peak*, it might take 30 to 60 months to get back to the peak, but in the meantime you are investing at lower levels and in 30 to 60 months you will be glad you did not try to guess the bottom.

    There is one newsletter that helps me keep the focus on these principles – it is called the Independent Advisor for Vanguard Investors. It is consistent and focused. Don’t let the name make you think that you can only invest in Vanguard.

    Look long term if you have a long term horizon. This year and next are only blips.

  40. Rob says:

    In a somewhat unrelated post, I disagree with the whole market timing argument. This doesn’t apply to 401k contributions since you’re continuously making contributions (or should be).

    Market timing in the short run is hard for the average joe and normally doesn’t work out. However, I don’t see why people don’t realize that bear and bull markets usually last a whole lot longer than 2 weeks. It’s not that hard, believe it or not, to time the market over a longer period of time. No, you’re not going to get ALL the profits, nobody can, but you sure as hell can help mitigate some of your potential losses by not riding out the whole recession by jumping on the long term value wagon.

  41. Gina says:

    Trent, I really must take issue with your advice here. By selling out now and buying into money market funds, she seals her losses whereas if she hangs tight, she has the hope of recovery–coming out with gains given enough time. Twenty years is plenty of time to see some recovery. She can change her allocation to include some money market funds if she wants to buy some peace of mind. And as retirement draws nearer, she may want to move into more conservation investments. This whole “credit crunch” is a mystery to me. If so many sub-prime mortgages are in default and, subsequently, in foreclosure, where are these newly homeless people? Wouldn’t you think the media would have them on parade by now?

  42. Trent Trent says:

    Around here, the foreclosed folks are either in tiny houses or in apartments.

  43. Imelda says:

    Trent, I don’t understand what you’re saying at all–

    Didn’t you tell Lila to “move everything into a money market account for…at least three weeks, then wait until I started feeling confident about the stock market again.” Aren’t you telling her to sell, and then buy back in when the stock market didn’t seem so shaky?

    And didn’t you say “Spend the next several months getting rid of some debts, then start looking at investing again.” Doesn’t that mean that we should not buy stocks now, but should wait for the market to calm down before buying?

    I don’t see how that means anything but buy low and sell high. Your original article never indicated that Lila should move away from stocks permanently, because she’s not comfortable with them. Instead, it seemed to be saying that she should cash out now, and then buy back in a few months later when the stock market might be higher.

    Don’t be so quick to deride your critics. I don’t think people were blindly speaking “from their own perspectives.” My earlier comment, for example, was based entirely on your own past writings. If so many people misconstrued your original article, perhaps you should reconsider it.

    PS: Correction! The last paragraph of your article DOES indicate (though somewhat ambivalently) that Lila should sell her stocks permanently. But that message is NOWHERE as clear as what I initially thought you were saying in the rest of the article.

  44. Trent Trent says:

    Lila should get out of stocks permanently – I thought that was fairly clear.

    The advice of selling now, then buying again in a year or so when the market is lower is what I would do in her shoes. I sold very near the market top and I certainly don’t intend to buy back in for quite a while yet. The advice about buying back in is what I would do, not what Lila should do.

  45. dong says:

    Trent, I understand your point, but I think the issue is more complicated than if she’s uncomfortable with stock she shouldn’t be in in them. Can she afford not be in stocks? The fact is that most people if they don’t invest in equities will most likely not have enough money for retirement. Bonds and cash hardly keep up with inflation if that so investing in conservative investments might be trading a good nights rest today for sleepless night in 20 or 30 years in the future. I don’t know enough about Lily’s financial situation, but sometimes people have to learn to do thing they’re not comfortable with.

  46. Jamie says:

    Trent, “deriding” and “disagreeing” are two, totally different things. I, for one, value your thoughts on every topic very highly. Just because I might advise differently in this situation, doesn’t mean I respect you any less.

    That being said, from the snippet of information you’ve given us about Lila, I didn’t really get the feeling that she was so terribly nervous about her investment. I get the feeling that she’s just asking a general question about investment strategy. Perhaps there is more to her email that leads you to believe she thinks she made the wrong decision with her initial investment in growth stocks. But, if it’s just a question about market corrections, my experience as an amateur investor says: hang on!

  47. plonkee says:

    If your investing portfolio makes you feel nervous, you have picked the wrong portfolio or you do not understand investing. Either way it requires more work on your part.

    For my part, I agree with Jamie that Lila doesn’t sound that nervous. I think she should hold out whilst investigating investing, risk and portfolios.

  48. Charley says:

    In my 401k, I bailed out of the stock market and into a Money Market Account last Friday, and I plan on staying on the sidelines with this chunk until at least November. However, my future contributions are still allocated primarily towards the purchase of stocks. I think this is an appropriate compromise position right now, as it allows me to preserve my capital, and also take advantage of the buying opportunity that these lower prices may represent.

    I’ve never tried to time the market before, but I think this is special circumstance. It has been a long time since I have heard such gloom and doom scenarios, and I think it is likely to get quite a bit worse before it gets better. I lost my hat and a** during the dot com bust, and I’m not happy to just go down with the ship again.
    A couple of other points: corrections are usually swift and dramatic, while the recoveries are usually quite a bit slower. This is probably why market timing usually doesn’t work. By the time you pull the trigger on the down slide, its over. Also keep this in mind: if you loose 10% and then gain 10%, you wind up with less money. Therefore you have more to gain by attempting to avoid loss than sticking with it because you are afraid of missing out on increase.

  49. Sarah says:

    Is the reader’s name Lily or Lila?

    And Trent, around here, the foreclosed folks are losing brand new McMansions as well as tiny houses.

  50. James says:

    Trent,

    You need to quit being such a prick in your comment responses.

    Your article gives bad advise and instead of saying that your wording may have been misleading and not conveying what you intended, you made it seem like we couldn’t read or comprehend your post.

    Also, your squirming around the issue is pathetic, there is no meaning to the post other than buy high and sell low because you are panicked.

    I love your ideas for frugality but sometimes you act like an expert on subjects that you are lacking.

  51. Matt says:

    This post highligts some good points. It is important to make asset allocation decisions based on personal risk tolerance. Investors shouldn’t be moving out of an investment because it declined in value, but if the overall portfolio is too risky it may be time to adjust. Often people think their risk tolerance is higher than it actually is, and a market decline like this demonstrates the downside of risky investments.

  52. Eric says:

    That’s why dollar cost averaging is more of a motivation tool than an actual strategy. It’s the only way I can really keep putting money in, when every impulse is telling me to pull out.

  53. Jon says:

    My money isn’t going anywhere. Of course I’ve got 40 years until I retire, so I rarely look at my portfolio. In 10 years this summer will just be a blip on the graph.

  54. PJA says:

    Today’s headlines: Fed cuts rate, stocks soar.
    Hope you didn’t sell Lilly the other day (unless you were moving into a more balanced fund to ease your mind).

  55. Jeff says:

    I completely disagree with Trent’s advice. (Note, I said “disagree,” not “deride.”)

    I’m not an expert by any means. But the whole *point* of investing for retirement is that you do so for the long term and you don’t worry about day-to-day market fluctuations. As an earlier commenter said, this is all going to be a blip in 20 years, when Lily (Lila? the original post uses both names) plans on retiring.

    I think this is the perfect exception to “the instant an investment makes you nervous, you should pull back into something safer.” Instead of letting the nervousness control her, Lily should examine the nervousness and decide whether it’s justified. I contend that it’s not. Don’t let your emotions rule your financial decisions if you can help it.

  56. Dave says:

    You know, I’m the opposite of Lily, I was going to buy some BAC and WFC with some of my extra cash, but WFC is up 10% over the past 2 days (BAC probably a little less). Opportunity lost…

    I sincerely hope Lily didn’t sell, but am reminded that for every seller, there is a buyer.

  57. Bill says:

    Trent,

    How did you know when it was time to sell your stock holdings “very near the market top?” What information led you to this conclusion?

    Thanks for your site!

  58. Gina says:

    Another detail Lily/Lila made about her situation is that her money is in growth stock funds which have not done as well over the past few years as value stock funds. Some experts are saying the market may be starting to favor these growth stocks over the value stocks. Of course, the recent volatility has resulted in nearly all stocks losing value. No details are provided as to how bad her portfolio has been hit with losses or how long she has been invested. Maybe some of her funds are up from where she bought in and she could move some out of her more profitable funds without taking a loss.

  59. Trent Trent says:

    Bill, I sold in June to pay for housing.

  60. “Lila should get out of stocks permanently – I thought that was fairly clear.”

    Oh, is that what you meant when you said:

    “If I were Lila, I’d move everything into a money market account for a while and sit on it for at least three weeks, then wait until I started feeling confident about the stock market again – or at least until I felt it was close to the bottom…”

    So when you said “for at least three weeks” it was supposed to be clear to us that you were advising her to get out of stocks permanently?

    Like others have said, instead of treating your readers as dumbasses that can’t comprehend the written word, you should own up to what you said, re-adjust your outlook, and then move on. It’s okay to be wrong, but you look foolish when you say something so clearly and then try so hard to deny it.

  61. I’m glad to see that the comments are pretty unanimous in their disagreement.

    Apart from how poor I feel that the advice to pull out and wait until you feel confidant again is, I don’t see what gave you the impression that she is staying up at night worrying about her investments.

    To me it sounds like she is knowledgeable and is considering a move that at first glance seems like a good way to improve your returns. If it’s not a good move then she clearly stated that she would “prepare herself to see the decline in value and wait patiently for it to begin to grow again.” That doesn’t sound like someone who is “too nervous to invest in stocks” at all. It sounds like someone who is rationally considering her options at this time.

    To me, the obvious answer should have been a vote for option # 2. And it’s good advice for everyone at this time. Prepare yourself to see a decline in value and wait patiently for it to begin to grow again. Or even… take advantage of the low prices by making some extra investments.

    And, whoa… Nickel is getting crazy…

  62. Grant says:

    If you are nervous about choosing particular funds for your retirement account, you should be in a fund that targets a certain date for retirement and adjusts the investments for you. For example, a 2025 or 2030 retirement fund if you are going to retire in about 20 years (do a search for one of these years in the Fund Facts box on the left of this Fidelity page and you’ll see a bunch come up). These automatically shift the investments to more conservative assets over time.

  63. Grant says:

    If you are nervous about choosing particular funds for your retirement account, you should be in a fund that targets a certain date for retirement and adjusts the investments for you. For example, a 2025 or 2030 retirement fund if you are going to retire in about 20 years (do a search for one of these years in the Fund Facts box on the left of this Fidelity page (http://personal.fidelity.com/research/funds/?bar=c) and you’ll see a bunch come up). These automatically shift the investments to more conservative assets over time.

  64. Ronald says:

    I would be interested in seing if everybody still thinks this way having seen the stock market down almost 13% since beginning of november

  65. Hi Trent,
    While I agree with you to a certain extent that you should not go forward if you are uneasy .. I also need to ask if you are easy simply because you are outside your own comfort zone.

    Some people when they first start investing become gripped by fear that something will go wrong. I think that you need to do your research and know what you are getting yourself into. Without being too emotional.

    I heard someone say that investing really is a boring this. Because it is a simple formula, get a return on your interest and then re -invest that. Usually it just requires you to buy something and hold it for the next 20-30 years.

    Nothing exciting about that, but the rewards are enormous

    Young Investor

    http://www.investmentrealty.blogspot.com

  66. Bob says:

    Selling now is guaranteeing your lost. If you’re in it for the long haul don’t take that advice.

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