Monday, January 21, 2008

The Stock Market is Getting Crushed! Should I Sell Stocks in My Brokerage Account or 401K?

Well, we are definitely having a correction. If the U.S. equity markets follow the Europeans they will be down 15% for the year tomorrow or 20% from the peak of the market in October. Many readers may be wondering what they should do with their stocks given the big correction? The answer is it depends on your time horizon.

For those with a long time horizon (10 years or more) and that should be most of you, you should generally ride this out and stick to your plan. Below you can see the inflation adjusted returns for stocks vs. bonds since WWII from this article in the FPA Journal.

As you can see, on an inflation adjusted basis stocks have far outperformed bonds since World War II. I particularly like this table because it only goes through 2003, before the market recovered from the tech bust. The bottom-line here is that as long as you have a long-term time horizon you should do better owning stocks than bonds. That suggests that you should not bail out of all your stocks just because the market takes a dive. Instead you should view it as an opportunity to buy more because good companies are now on sale. Remember to maintain your international exposure as well, these stocks will be the most volatile in market swoons, but they should also have the more growth than US equities over the long term. Emerging markets stocks should be particularly volatile, but should also have the best long-term growth characterization.

If you plan to retire in less than 10 years, you should have at least 30-40% of your portfolio in bonds or cash. If you do not I would advise immediately raising enough cash to survive for your first 5-7 years of retirement and then ride out the rest of your equity exposure with a long-term view.

The bottom-line is: don't panic. Most recessions last 12-24 months or so. Stocks have historically represented a great long-term investment and they should continue to do so in the future. The worst thing you can do is panic and lose confidence in your investment plan. Stick out the tough times and even invest more in stocks that go "on sale" if you can afford to and you will be rewarded over the long-term.

Please note that the above is merely the opinion of the author. Please consult your financial professional about your specific circumstances.


yeehaa99 said...

this time around, i think the international market would get stronger. So, if you are a long term invester during this down time, i think investing in international stocks would be a good strategy. of course that's just my opinion.

hector said...

Great article. Even though if you can buy ETF using your 401K or IRA, I recommend you to use any of these:

So even if the market goes down you can make money.