A year ago today, the Dow Jones Industrial Average closed at 14,164.53, a new all time high. Today the DOW closed at 8,579.19, a drop of nearly 40% in one year and the lowest close in five years. The S&P 500 and the NASDAQ are down by similar amounts. If you had $10,000 in the market a year ago and haven’t done anything since then, you lost $4,000. If you had $100,000 in the market a year ago and left it there, you lost $40,000 over the last year (at least on paper). That’s tough to take if you are heavily invested in stocks.
Should you sell your stocks and convert them to cash? Probably not. The time to sell some of your stocks was a year ago, or 6 months ago, or even a month ago. But now you are probably too late. Your stock has already lost 40% of its value. If you sell now, you are locking in that loss.
Of course, if you keep your stocks, they could lose even more value over the coming days and weeks. On the other hand, the market could bounce back at any time and your stocks will regain some of their lost value. If you sell your stocks and the market bounces back, you will miss the gain.
The best reason to sell stocks now is if you need the money now.
If you don’t need the money for 5 years or longer, you are better off at this point keeping your stocks. That’s tough to do when everyone else is selling. The emotional reaction is to sell your stocks to keep them from losing any more value, but most of that has already happened.
Will the market go down? Yes. Will the market go up? Yes. Has the market hit bottom? No one knows. The market goes up and down, but over the long haul it goes up more than down. That’s the reason for owning stocks. Over the long haul stocks give a better return than bonds or cash. The key is “over the long haul”.
You can reduce the volatility by having a percentage of your assets in bonds. The conventional wisdom is to subtract your age from 110 to determine how much of your portfolio should be in stocks. If you are 30 years old, 80% of your portfolio should be in stocks. If you are 50 years old, 60% should be in stocks. A 60%/40% ration of stocks to bonds will give you 85% of the return of an all stock portfolio but only half the downside risk of an all stock portfolio. Even if you are retired, a portion of your portfolio should be in stocks or your portfolio may not last long enough.
If you decide you are too highly weighted in stocks, wait for the market to have some up days and sell some of your stocks and buy bonds (or transfer money from some of your stock mutual funds to bond mutual funds).
More advice is here. It would be worth your while to get the November 2008 issue of SMART MONEY (published by the Wall Street Journal) and read the suggestions beginning on page 70. Listen to Marketplace on NPR and watch some of the programs on CNBC.