Right now, there’s a temptation to feel that we’re throwing good money after bad when we invest. And are we? Well, some people are (mis?)taking Jim Cramer’s advice and pulling out of the market. But here are a few things to consider before pulling your money out:
- What Cramer actually said was that money for the next 5 years shouldn’t be in stocks. That has always been true. I don’t like Cramer and I think that he has a bad effect on investors (and perhaps the market) overall, though some of his non-investing stuff is ok. But what he said was simple conventional wisdom. This is why you have an emergency fund and short-term savings or why you should build them. Many of us will not need our retirement money (especially not all of it) in the next 5 years, so that should stay put.
- The market has already gone down significantly. You’ll have less money to buy in and be able to buy fewer stocks when the price goes up. By taking your money out, you’re losing the chance to get it back. Yes, that sounds like gambling, but stocks have always been a gamble of sorts, which is why most stock experts recommend asset allocation which includes bonds and perhaps cash.
- This is probably not the end of the financial world. Yes, it’s bad. It may take a while for the market to recover. But that does not mean that the market will not eventually recover.
- It’s always been better to buy when the market is down. Unless the stock disappears entirely (which is why it’s better to buy the market by indexing), then the best way to make money on it is to buy low and sell high. That has always been a key tenet of investing, whether in a bull market or a bear one.
Now, you might be throwing good money after bad if:
- You don’t practice proper asset allocation. If you haven’t been allocating properly already, this is as good a time as any to start. It does have to be hard. A good start might simply be a good S&P 500-based index fund and a solid bond fund (e.g. VFINX and VBMFX). Allocate percentages based on how close you are to retirement (less in bonds for the young, more in bonds for the old). If asset allocation feels to complicated, consider using a target retirement fund from a firm like Fidelity or Vanguard.
- You try to time the market. Market timing is fine as a hobby. If that’s what you want to do with your disposable income, go for it. But if your income isn’t disposable, then you can’t afford to take that kind of chance.
- You try to get rich quick. Some days I wonder if I’m cut out to work at a library. I see a lot of people checking out books which make my heart sink. Maybe they’re checking out day-trading books from 1999 or books on how to make a quick profit in real estate with no money down (from 2002). I wonder when it would be wise to speak up and when it would be butting in out of turn. They don’t come to the library to get my opinion on personal finance. And I’m not an expert. But I know enough to know that these books are not a safe course of action, especially now that they’re so out of date. It’s hard to argue for purging them, however, because they’re so popular. In the end, the library is about making the books people want available, it’s up to them to mark smart decisions with the information.
These are bad practices at all times and in all markets. Like many bad practices, they sometimes yield good results in the short term. You may run red lights for years before you get into a traffic accident or have a speeding ticket. That does not make it safe or a wise choice on your part.
I can’t say I’m not scared at times. But the best thing we can do is not to let fear paralyze us or influence decisions that are against our better judgment. If we do so, we’ll have all of the pain and gain little or nothing by the experience. Instead, this is a time to learn more about general theories of asset allocation and how they work with our personal investing goals and risk tolerance.
For those of us who aren’t yet at retirement age, this is particularly important. If we learn now, then we can protect ourselves in the future. We must not forget the bubbles and bursts, because they happen in big and small doses. We must not get so intoxicated when the market goes back up that we forget it could happen again.