When the markets are tanking, it's hard to watch your contributions to investment accounts evaporate. That's just what one reader, Terry, had on his mind when he asked:
I moved about 50 percent of my 401(k) into a stable value fund about three weeks before the Wall Street drop. The rest of my funds are in five different funds, all of which have dropped quite a lot in the last two weeks. Should I leave them alone? Should I get back into them at some point when their value is about 30 percent lower than when I got out of them?
While each person's situation is different, the best advice is usually to do nothing in response to market turbulence. It goes against all our instincts, but selling stocks after the market has plunged only guarantees you one thing—losses. As long as your investments are well diversified (index funds and mutual funds that are exposed to a broad range of sectors) and age appropriate (more aggressive when younger, more conservative when older), then you should just sit back, relax, and try to think about something other than the stock market.
But don't just listen to me; take it from the experts. Here's what three investment managers had to say in response to Terry's question:
Charles C. Zhang, managing partner, Zhang Financial:
From my experience, market timing is a losing strategy. Therefore, you are very lucky to have moved 50 percent of your money out of the market before the Wall Street drop.
To properly answer your question, I would need to know your age and time frame before retirement, as well as your risk tolerance. That being said, as long as the investments you currently hold are good funds and you have a decent mix of small value, balanced, and large cap holdings, they should be left alone. At this point, selling your equity investments would only solidify your losses.
You also asked when you should get back into the funds—when they are down 30 percent? Again, this goes back to market timing. How would you really know when it is the "right" time to get in the market? The direction of stocks can change very quickly. Market rallies often occur very fast, without warning, and over a very short period of time. If you happen to be out of the market during those times, you could miss out for all or most of the gains that year.
If the funds are suitable for your risk level, I would suggest getting back into the market now. What if the funds drop only 29 percent? You would never buy them back if you were waiting for a "30 percent drop"—and you would miss out on the potential gains. No one can "catch the bottom" when it comes to the market. Market timing may sound good in theory, but in practice, it is simply not practical.
Tom Hepner, investment adviser, Ruggie Wealth Management:
I suggest remaining invested. Since the account in question is a 401(k), losses cannot be recognized for tax purposes. Depending upon the age of the individual, the stock market should perform well over time, if history is on their side. For someone nearer to retirement, an allocation in fixed income could be more appropriate. Since the market outlook has been uncertain, a 401(k) is an effective tool for dollar-cost averaging into a diversified portfolio. That is a pretty unbeatable strategy over the long haul!
Adam Bold, founder of The Mutual Fund Store:
Based on what I know about your situation, yes, I believe you should fully reinvest all your 401(k) assets in a diversified asset allocation as soon as possible. You were fortunate this time when you decided to move half of your account assets to the value fund, but you shouldn't take that as an indication that you will be able to time the market on a regular basis. In the long run, you're going to be better off by staying fully invested. Having success when attempting to time the market is a lot like hitting a jackpot the first time someone goes to Las Vegas and thinking they're going to win every time they go. It feels good, but it's not going to happen on a regular basis.
This is a time when all investors need to spend extra time evaluating all of their investments and in what proportions they own them. Without knowing all of the funds that are available to you, it's difficult to make specific recommendations. Your employer's retirement plan sponsor may offer advisory help, or you can find services online, such as at Smart401k.com, which, for a small fee, help individuals with recommendations for assets held in employers' retirement plans. I encourage you to find help as you evaluate your options. It's important to remember that securities have no memory of what someone paid for them, and that shouldn't be a consideration as you decide to again fully invest in a diversified account.
Reader Comments Read all comments (7)
jake of ME 2:54PM March 05, 2009
jim Orvill of PA 9:41PM March 03, 2009
R.L. of FL 9:04AM December 19, 2008