Don't look. Seriously, don't look. I have no idea what's going on with any of my equity investments, because that is not short term money that I need to keep my eye on.
If you look you will get upset, and you will be tempted to do something stupid. I can't guarantee that the market won't drop further and you won't regret having held on. But as a general rule, selling into a massive liquidity crisis is a pretty bad idea. Selling in a panic because your assets just dropped 30% is almost certainly a bad idea.
The good news is that while the stock market can take a long time to recover, it historically doesn't actually go down for more than a couple of years.
Yeah, that's not very good news. But unless you're planning to retire right now, my advice remains the same: don't look.
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Head in the sand approach, eh? I don't know that I've ever heard someone advise investors to refuse accurate information.
I basically agree with this advice, but insofar as this crisis resembles the burst of the Japanese asset bubble in the early 1990s, I'm rather pessimistic about the predictive value of past performance in this particular case: My friends who stuck with the market through its decline in the early 90s have never seen their investments recover their value: In fact, the Nikkei index closed yesterday at 27% of its peak value 19 years ago. Is there any reason we should fare any better?
Procrastination - an investment strategy I can handle!
If you're young, now is a good time to rebalance. Take money out of your bond funds and stick it in your stock funds. (Sell high-buy low)
Bring the percentages of your holdings in line with the percentages of your contributions.
I'm pretty glad I went all cash in April. Now it seems time to jump back in. I still got brutalized since last October.
A quick warning: get out of the money market. I suspect that the next big area to crash are money market funds. If you have money in a big fund, cash it out now. That's one area where it doesn't pay to put your head in the sand.
The number 1 question to ask on your investments: If I were all cash, would I buy this item right now?
Earlier this year, I went into hedge mode. I split my money out to FDLXX (Treasury short-term "money market" fund), BEARX, Fidelity Japan, Winslow Green Growth, Fidelity Select Energy Service (FSESX), and Prudent Global Income Funds (PSAFX).
BEARX and PSAFX have been a great hedge, while Winslow and FSESX have been slaughtered. Even so, WGGFA and FSESX are staying in my 401k. Why?
Even if the consumption of oil worldwide drops 10%, we're still at 90% of production capacity, assuming no loss of production. That's not even enough spare capacity to absorb one major producer going offline. We need new oil supplies desperately, bad economy or no. Also, we need alternatives to oil, and green growth is where that's happening.
As negative as I am about this market in total, I'm considering throwing more money into both WGGFX and FSESX, because I think both are good long-term plays. I want to wait and see if the rest of the market keeps panic-selling the two first.
Relative to inflation, is either the DJIA or the S&P 500 higher than it was 10 years ago today? I don't think either is.
If you were planning to retire now, you probably should have got into some really low-risk investments a couple years ago anyway. If you didn't, whoops!
Its not refusing accurate info; its refusing to panic yourself.
Michael,
Your comment had me rolling. Well done!
I have no idea what's going on with any of my equity investments
Oh, come on now. Even I have a good idea what's going on with your equity investments, and I don't know the composition of your portfolio. (Although given your general good sense on such matters, I bet you're mostly in index funds.)
You've lost a lot of money, just like I have.
Excellent advice. My 401K undoubtedly has taken a hit in recent weeks, but I'm not going to fret about it.
I got out of the stock market when the Dow hit 14,000. Told my broker to sell everything that wasn't nailed down. Told her to invest it in really safe things. Bond funds and the like. But I agree with you Meg, I'm not looking. Because I know there is some stuff I have lost money in (my broker has told me that much).
There is no point. I'm not going to get the money back. I don't have any idea where else to move it. There is no earthly reason why I should move anything. I have another 30 years until I will be accessing the money. A lot can happen in 30 years.
I'm just happy I didn't own any AIG stock.
Its not refusing accurate info; its refusing to panic yourself.
I got this from someone else, but:
Rule #1: Don't Panic
Rule #2: If you do panic, do it first
It's already too late to follow rule #2, so you need to go with rule #1. If you wanted to sell then 6 months ago was the time to do it. Doing it in the middle of a crisis is too late, and you'll likely lose more money if you do.
If you're not going to retire soon, then you're a net buyer of securities.
If you're a net buyer of securities, you want prices to be low, not high.
Equity prices today are at 2001 levels. It's like a time machine that lets you go back and invest in the market back when it was cheaper.
What if the bottom falls out next week, you ask? So what if it does? You weren't planning on becoming a net seller next week, were you?
Anyway, even if you could be sure that next week would be murder on the market, then the best advice for net savers would be to wait until then to buy. Since you can't be sure, you might as well buy now.
Selling when prices are low only makes sense when you don't have time to wait for the market to recover or you've got an individual stock and you're worried that the price will to go to zero.
My 401k is now worth less than the paper it's printed on because I have a really aggressive portfolio. That said; since I'm not planning to retire for another 30-or-so years there's plenty of time for it to recover. Moreover, I actually see the market crash as a wonderful buying opportunity. My $1000/month contribution will now buy me a lot more shares and when they eventually recover way down the road, I'll be sitting pretty. Of course, this only works if you have a long-term mindset. If you're planning on retiring soon and had most of your money in stocks; you're kind of screwed.
I actually looked. (To a curious guy like me it's the equivalent of a "don't think of an elephant" order).
It wasn't as bad as I thought. I've lost most of the money I've contributed this year, but that's it. And that doesn't even take into consideration my employer contributions. Though, I checked this last week, so I don't know how it looks after yesterday.
Old market saying:
"If you can keep your head when all about you
Are losing theirs...
Maybe you haven't heard the news."
I received some slightly different advice that made sense to me:
Don't shift your long-term holdings mid-crisis. But it's not a bad idea to change your investment elections going forward. Let the bad investments ride out the storm, but there's no point in throwing good money after bad. A little more in bonds and a little less in that overseas discovery fund for the next 6 months can't hurt.
I have put all my money into pumpkin futures, and will close the position in January.
I looked. Succeeding reasonably well in not panicking. I am planning to take my house down payment out of its money market fund and put it into a savings account, though.
Down 53% since June 2007, 35% for the YTD. Go Vanguard Global Equity Go!
It is clear that only the omniscient or the lucky were able to sell before all this started, while the rest of us have taken enormous hits to our pension and brokerage accounts. One way I have been able to cope, besides just not looking, is to review my asset allocation and long term risk tolerance. I have realized I am not actually as accepting of risk as I believed. Tthough I will take this opportunity to buy bargains, I will in the future keep a much smaller portion of my portfolio in stocks and stock funds.
Retired in 1993, now widowed, too (stupid, ignorant, lazy, take your choice) to learn about the stock market. I had too much in equities, everything in mutual funds, and now my 401(k) is down 30%. I would like to put the blame on somebody, but guess it is my own fault. At least my house and car are paid for. Not much to leave my kids though. Sorry about that.
If you are about to retire, you are incredibly foolish if you have a larger proportion of your nest egg in the stock market. Note that this is not a statement about the current crisis, but a statement about intelligent asset management. Don't take risks if you can't live with the downside.
At the top my "portfolio" was $74k; now it's $54k. Pretty much all in stock funds, so it was expected, but still. In any case, I can't change how most of it's invested since it's in my previous company's 401(k) (current company has no retirement savings plan) so I'm pretty much stuck riding this out. I put my chances at ever retiring between slim and none anyway, though, so it's really more of an annoyance than anything else.
You had better look. Know what you own and make some intelligent decisions. It is hard to come back from 50% or more down. Many people put their heads in the sand and rode their Janus funds all the way down in 2000-2002. Those people have not come back. It is possible to set up a mutual fund portfolio that will outperform the market.
Megan,
this is a ridiculous piece of advise. The fact is, people need to determine where their invested dollars (whats left of them) are going to go, not where they have gone. If you can save another 10% - 20% decline by moving funds into cash equivalents or treasury funds, DO IT. Then reinvest in the equities market.
I agree that this takes into some additional market timing risk, but I would rather miss some of the upswing if it means I reduced my exposure to the down-side.
@Psittakos:
People who rode the broader market down in 2000-2002 have certainly come back. Even before dividends, the market was recently near 2000 peak levels. Since then, stocks have been cheaper, meaning that folks that kept investing from 2000 on have more equities today than they would have had if the market had not crashed in 2000-2001 but had instead stayed level that whole time. Think about that: people who kept investing after the tech crash are better off because of that crash; those that sold are worse off. Down markets are good for buyers.
@liberalrob:
Are you sure you have no control over your old 401(k)? Most plans allow you to change your asset allocation even after you leave your job. You can also usually roll it over into an IRA. Check with your 401(k) custodian to make sure.
@CarolO:
Leave your kids the stock -- you haven't lost any shares. They shouldn't care about the price today -- they should care about the price years out.
I posted this same thing over on Scalzi's site, after he linked to this article. This is not investment advice. I'm not telling you to sell. However, I am saying that if you believe the market is not done falling, then selling is something worth considering.
This is exactly the right time to sell if you believe the market is going to continue going down. There are lot of people whose opinions I trust (Barry over at The Big Picture for one) who think this is only the beginning of the market decline. People are talking about the S&P dropping to a P/E of around 5, before we start seeing movement the other way. That means there is a huge amount of bleeding still to come.
Numerian, over at The Agonist, is predicting a year-end rally on optimism followed by a much larger crash next year. The fundamentals don’t do much to discredit his ideas.
Personally, I’m thinking we may not see a year-end rally at all. It really depends on how Q3 earnings do and if more states follow Cali and Mass down the road to insolvency (and how quickly the insolvent states are able to get loans, which is looking bad right now). I think that no matter how you slice it, next year is going to be a terrible year for the markets and the world economy in general.
Holding on to volatile assets during an economic crisis is a fool’s game. Lets run some simple numbers. I sold all the equities in my retirement accounts about a year ago (except some european index funds, since I was expecting the credit crisis to sink the US, but that Europe would decouple. Boy was I ever to optimistic about that). That was back when the Dow was around 14,000 (remember those days?).
Now the Dow is sub 10,000. I would not be surprised to see a sub 7,000 Dow at some point. But anyway, that is a 33% drop in the last year. Say that you and I both had 10,000 in the market last year. I sold, you didn’t. Right now, I’ve got 10,000 and some change. You’ve got 6,666. When the market starts going back up, I wait a while to make sure things are stable and then reinvest. I reinvest when your portfolio is worth around 8,000. We both ride the upswing, except I have a massive head start.
I’m not talking about market timing here and trying to make money on every bounce. I’m talking about looking for general long-term trends. This is not financial advice. But if it was me, and I looked around and saw that there are substantially more losses coming in the market, I’d get out now. Better to sell at a 33% loss than a 50% loss. Your existing loss is a Sunk Cost. You can’t get that money back. But blindly holding since it should eventually go up will just cost you more money. It will be pretty obvious when things get straightened out and the markets start to rebound. Just like it was (to those paying attention) pretty obvious last year that this storm was coming.
Yeah it sucks to take a 20,000 dollar loss right now. But wouldn’t it suck more to take a 35,000 dollar loss later. Just because you didn’t sell doesn’t mean you haven’t taken the loss.
This is not financial advice. I’m not telling you what to do with your money. BUT do not fall into the trap of thinking that since it is on paper, you’re not taking a real loss. You are. And will kill your portfolio performance and ability to eventually retire.
You had to make me look...
Ralph,
Of course you buy when the market is down and you do dollar cost averaging and all that, but you don't just blindly ride down whatever you have. You don't mindlessly sell into weakness, but appropriate safety moves give you more money to work with when the time is right. Believe me, when the "new economy" funds went down a few years ago, a lot of people took losses that they have not recovered from.
Your stocks aren't an investment they are a speculation. Stocks are primarily speculative. Only if you buy stocks and put high weight on yeild, ie. dividends, can stocks be called an investment.
To be called an investment the money must be deployed with a reasonable expectation that it will return income in cash. Either cash flow from profits or above inflation return with interest earned. Any money deployed in the expectation, or hope, that the asset can be sold later at a higher price is speculation.
Read Wealth of Nations. Go blind looking for the part about wealth being created by asset inflation.
Richard:
Yes, there is. The valuation of the Nikkei at that time was more comparable to that of the Nasdaq in early 2000 than to the S&P 500 at its recent peak. Barring a major long-term shift in fundamentals (e.g., drastically reduced profits), the S&P 500 is currently fairly valued, or perhaps even a bit undervalued. A fall on the order of what the Japanese saw would not be sustainable.
My 401(k) is in a mix of index funds--domestic and foreign. And I don't look. Haven't looked in months. I assume I've lost $30K or more. But it was never real money anyway. It doesn't become real money for another couple of decades.
I'm really not worried. Not a single person in this country has lost their lust for stuff. And a new approach to energy is going to put a heck of a lot of new stuff out there that is "good for us." Good for the environment, for our electric bills, and, darn it, just cool. And where there is a will, there is a way. The sun will come out. [Insert your favorite cliche here.]
Great advice, Megan.
And for those who do look... it's really too late to sell your existing stock holdings and adopt a defensive strategy. The bottom may not be far from here -- there's a lot of money on the sidelines earning increasingly lousy yields, and at some point everybody who is going to sell will have sold -- although it may be a while before we see meaningful upward movement. Best to sit tight and ride it out.
If you can't resist the urge to bargain-hunt, look for healthy large-cap stocks that a) pay a good dividend and b) are likely to be able to sustain that dividend through an ugly recession.
I did the "if you can't figure out what you're buying, sell" thing about a year ago. I'd be doing somewhat better now if I'd held on, but I'm willing to take a loss on a risk I understand than take a risk I don't understand.
Ralph - thanks for the tip. It made my day. I have an appt to see my Fidelity guy today and I will sure bring this up as a good suggestion.
"The good news is that while the stock market can take a long time to recover, it historically doesn't actually go down for more than a couple of years."
You must be joking.
You can write this without trembling fingers after what we have lost believing experts who assured us that "historically real estate never goes down"?
You seem to be forgetting 1932-1954. Or was that in an alternative universe, by your reckoning?
Sorry Megan.
I sold most of my 401K equity holdings in the summer of 2007 because it was clear to me that the global mortgage debt crisis was a huge bubble whose bursting would devastate equity holdings. I've been 95% cash since May 2008, 100% cash since August. And I've just about entirely avoided any damage to my portfolio which has lopped off 30%+ to equity holders in the past year.
Buy and hold is for people who are willing to be left holding the bag when all the "leaders" have departed the plummetting aircraft wearing their parachutes.
Anyone who invested $100,000 in 1998 in the stock market is now sitting on 30% losses, counting inflation.
Sorry, there is no magical law of the universe that makes "buy and hold" a good idea when you are buying at historically inflated P/E ratios, backed by fraudulent earnings.
Yeah, hang in there, you with 20 or 30 years to go. All the "best" investment advice in recent years has been that those of us near retirement should STILL be 50% or so in stocks in case we live a long time. Sure glad we followed that advice. It will just seem like we are living longer because we won't be able to retire.
Anyone who invested $100,000 in 1998 in the stock market is now sitting on 30% losses, counting inflation.
PAPER losses. (And only -30% if they bought the S&P, which is NOT "the stock market" -- plenty of folks are net flat or up over that period, and I don't mean hardcore traders, just people who diversified out of VFINX or whatever.)
If you resist the urge to sell at the bottom of a bear grind, you don't suffer those losses. Selling now -- or suggesting that others do so -- is just plain silly.
jimbo (10/7 11:22 AM):
Old market saying: "If you can keep your head when all about you are losing theirs...Maybe you haven't heard the news."
I thought it was "If you can keep your head when all about you are losing theirs...then you aren't Jim Cramer."
For the "buy and hold" crowd:
Today the S&P closed at 42.4% lower than its high of just a year ago.
In order to make up all those capital losses, you need a gain of 73.7%! That could easily take more than 10 years to happen.
BTW, I bought some SSO (double long S&P 500) today after the close (just for a trade). After 7 mostly large losing sessions in a row, including a huge one today, we are deeply oversold and a trading bounce is likely.
Nikkei index closed yesterday at 27% of its peak value 19 years ago. Is there any reason we should fare any better?
Of course the Japanse are pikers...
I recall reading (though I can't find a reference now) that after the South Sea Bubble, the British stock market recovered its 1721 peak in 1968.
That's 247 years to get your money back, not counting dividends.
(That might be AFTER inflation, I'm not sure, I can't find any reference that has the market data back that far.)
Matthew C,
I remember my grandmother's steady hand during the '87 plunge. She lost 35% value on a million dollar portfolio. In other words she woke up on morning and was worth $350,000 less than the day before. She looked at her companies, made a few slight changes, but was satisfied that most of them were solid. Less than two years later her portfolio had recovered all "losses." Lesson for me was, there is something to be said for keeping one's head.
Cheers,
PTR
There is a lot to be said for keeping one's head. Unfortunately, I don't think this is like the '87 crash, and I don't expect the markets to bounce back as quickly or completely. I think we need to look at the last ten years and the prospects for stocks over the next few years and adjust to reality.
Forget about the averages. It took from the peak in the 1920's to 1954 or 1955 or so for the market to get back to the same peak. So, the averages are good only when you factor in the returns from the mid 80's thru 1999. Advisors always say, historically the market returned 10.x%. Yea..over decades. Many of those decades were big losers. As the depression rolled thru, people lost about 85% from the peak. Hope it never comes to that but can you wait 30 to 40 years to break even?
Yours is the among the best advice I've heard recently.
Those who remain fully invested and continue their 401k contributions through this shakeout will be the winners.
Awhile back a group of researchers from Dimensional Fund Advisors reviewed the performance of the S&P 500 from January 1970 to December 2006. The annualized return for that period was 11.1%.
But here is where things get interesting.
When the researchers removed the 25 best performing days of the market over that 36 year period (less than one day per year), that 11.1% return dropped to 7.6%. A HUGE difference!