Normally, I’m envious of Trent’s ability to write thoughtful posts over at The Simple Dollar. He could write about cat poo and people would read it. However, today I came across a post of his from last week titled Basic Investing in a Down Market (Or Any Time You Feel Like It), which was written in response to an email from a reader who was nervous about the market. Here’s her email to Trent:
My 401k is heavily invested in growth stock mutual funds (several different ones but all are growth stock oriented).
Iâ€™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. Iâ€™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, Iâ€™m in my 40â€™s, so Iâ€™ve got about 20 years before I plan to start withdrawals.
Here’s the first part of Trent’s response:
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 itâ€™s served me incredibly well so far.
If an investment makes you nervous it’s because you:
- Don’t understand how the market works
- Don’t have a solid asset allocation plan
or, most importantly…
- You don’t have your emotions in check
Unfortunately, Trent’s philosophy caters to one’s emotions and has nothing to do with being conservative.
As bad as that first part of his response is, this part is even worse:
If I were Lila, Iâ€™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 donâ€™t think weâ€™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).
This is the part that really bugs me: “…or at least until I felt it was close to the bottom.”
It’s anybody’s guess as to when the market is at the bottom. Therefore, don’t worry about it if you are an investor for the long term. Trying to time the bottom of the market will wreak havoc on your emotions, especially if you time it wrong. For instance, what happens if you think the market has bottomed and you move all your money back into it only to find out that it still had room to fall? Or, say the market keeps going up and with each increase you think it is more likely to fall again so you sit on the sidelines waiting for something that never happens? See how silly this can become?
My advice to Lily is to stick it out provided she has a good asset allocation plan. She still has 20 years until retirement, which bodes well for stocks.