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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