Why You Should Always Be Ready for a Market Sell-Off


Why You Should Always Be Ready for a Big, Scary Stock Market Sell-Off

Here’s how I normally deal with sell-offs:

1) I don’t look at the 401(K) balance. It’s not going to do me any good to do so because it’s not going to change our strategy.

2) I think of all the additional shares we are going to be able to buy at lower prices. Think of the sell-off as a giant SALE!!!!

3) I increase the contribution amount if possible. We are contributing the maximum now, so we won’t be able to do that.

Uh-Oh! Here We Go Again

From this weekend’s WSJ:

The market’s record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling “sucker punched,” she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor’s 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

“What really tipped our hand was to see our cash not doing anything while the S&P was going up,” says Ms. White, a 39-year-old dermatologist in Houston. “We just didn’t want to be left on the sidelines.”

“We just didn’t want to be left on the sidelines.”

Sounds familiar, doesn’t it?

1. Sell everything after the market crashes.

2. Put it all in the bank (meanwhile the market turns back up again).

3. Time passes and suddenly they’re reading and hearing about the stock market reaching all-time highs.

4. Feel like they’re missing out.

5. Dive back into stocks at an all time high.

It’s the exact opposite of buy low, sell high.

This couple is just now in their late 30s. They should have never have gotten out of stocks completely. Rather, they should have had an allocation plan and should have utilized dollar-cost averaging to take advantage of lower stock prices during 2008 and 2009.

I have a feeling this couple’s going to get burned again.