Definitely important not to lose your head and start selling. You have to think long-term. Had someone panicked and sold in the last week or two, they would have missed out on yesterday's big day. All will work out in the end if you stick with a plan of regular contributions and leave your money to grow.

My solution? Investing in Tums and Pepto-Bismol.

I've got the overwhelming majority of my 401k in stock market index funds right now. I understand that it's a dumb idea to pull my money out now while the market is down, especially since I plan on leaving it alone for the next twenty years at least.

On the other hand, what about new 401k contributions? Should I keep plowing those into the stock market? Or should I start putting those into something a little less volatile for the next few months, then transfer all that money into my index funds later (when hopefully they'll be a bit cheaper)?

If you want to build your own, diversified portfolio that can weather the ups and downs of the market, look no further than...

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

The biggest lesson to learn is "no matter what they tell you, NO ONE can consistantly time the market".

@Corydon:

I usually have my 401(k) contributions put directly into a bond fund. Then, every 6 months to a year, I use that money to rebalance my investments back to whatever allocation I have as a target.

So If I'm aiming for 25% bonds/75% stocks and six months later I'm at 20% bonds/80% stocks, I'll use the money to get back to my original 25/75 ratio.

Only stock tip you will ever need - Buy low, sell high.

I guestimated the top of the market at about 13750 and pulled out completely. I'm waiting to see how the current disaster with the credit crunch goes before putting back in.

I am guessing around 10.5 to 11K for bottom.....

@Aladdyn: Yeah, sounds like econ 101 to me. Seeing your portfolio drop 30% in a year sucks but if you sell low you're doing it backwards...

@Corydon: Now is a great time to invest in stock funds (think "buy low"), especially if your investment horizon is 20 years.

Don't Sell Stocks in a Down Market, Short Them.

I read advice like this and think about the poor folks who owned Lucent and lost their retirements....

@bustit22: Im the same way. Same with the different pockets within the market. I like to keep 10% in an emerging markets fund, 15% in a small cap, ect... I was shocked to find I posted a gain for the last three months.

My biggest tip, if you are in a managed 401k, dont check it daily. You wont know what to do with the money even if you wanted to move it and you will just drive yourself crazy.

@starrion: You got extremely lucky. How can anyone in the world predict the "correct" pricing of an entire composite index?

If you have a financial advisor, please, please, please do not ask them to sell out your MUTUAL FUNDS or Managed Accounts, only to change your mind the next day when you see the market is up.

This drives me insane to no end; please don't try to be a market timer, you will get burned.

- a financial advisor

@greenpepper: Yeah that's why you diversify. Anyone who puts their all retirement money in a single stock is just asking for it.

especially be careful about having a large percentage of your 401k in your own company stock..

If you pulled out AFTER the drop last week, you would have missed yesterday's huge gains (nobody really saw that coming).

The lesson? Invest for the long-term and leave it alone!

@Aladdyn: Fear? That's the other guy's problem.

@RandoX: Except the bigger problem is something called the "disposition effect", where investors are far too likely to hold on to losing stocks (hoping that they'll turn profitable later) and sell winning stocks (to lock in their gains).

The best advice is not to try picking winners and losers and just buy some nice ETFs (because paying enough in commissions makes *any* stock a loser). But if you're going to trade, you shouldn't be afraid to sell cheap (especially if it can offset a capital gain elsewhere).

@Corydon:
Yes, continue to buy into the market with your new contributions. You will be dollar cost averaging and when the market recovers, you will have a lower cost basis.

I've actually been buying, not selling. And in Wachovia and Washington Mutual too. Wachovia's going to make it through to the other end and WM will likely either make it or be bought by a bigger fish. I made major dinero when Hibernia was purchased by Capital One, even after the stock offering decreased due to Katrina. The trick is to be patient and wait it out. I've also recently (for me, this was in January) purchased Target, iRobot, Intel and some foreign and domestic ETFs. Most of them are hurting right now, but it'll get better before I'm ready to sell. I tend to buy and hold.

@ClayS: I thought we'd realized that DCA by itself was a myth:
[www.fpanet.org]

@Corydon: Dips are buying opportunities. Regular (20$, 30$, 100$ a month) securities purchases create an average cost (basis) for the purchased security.

Your purchases during down month(s) mean you get more for the same amount of money as the previous month(s).

If you are considering a sell, ask yourself one question first:
Have the fundamental reasons I purchased this security changed as compared to when I purchased it? If yes: Sell. If no: Look for a buy window and buy more.

@deedrit: All brokerage accounts do not allow shorting. Besides Unless you are intimately familiar with this strategy it is best to stay away until you are.

Some virtual exchange experience may be well advised. Test your theories with fake money. Make it more realistic for yourself and use denominations you would really use.

[vse.marketwatch.com]

Thanks for posting this one, Consumerist. After watching my 401(k) tank over the past few months, I needed some reassurance to not worry about the short-term losses and get my focus back on the long haul.

I have traded for my own account for over 30 years and I'm often appalled by these blanket statements made by so called authorities.
Whether you should sell or hold on depends entirely on your time horizon. Are you planning to retire in a few years? Then maybe you should consider lightening up your exposure to equities when the market rallies like it did yesterday. You should be aware that there have been a number of times in the past when it took the markets 10 or more years to recover from Bear market losses. If you don't need the money for 30 years then you can afford to sit tight. If you can't or won't take the time to learn about this extremely complex and challenging subject then you should stick to dollar cost averaging into index funds that you can afford to hold for decades.
We are now in completely unchartered waters in the Financial Markets. The Federal Reserves is taking extraordinary measures to avoid a catastrophe already and we aren't even officially in a recession.
Some of the best advice I've ever heard regarding investing came from the Master Himself the sage of Omaha, Warren Buffet, "Be fearful when others are greedy and be greedy when others are fearful".
There is the potential here for far more fear than we have yet seen.

@Corydon: I've actually upped my contributions into my large and mid cap mutual funds. You never want to financially abandon all the volitial markets. They hit hard but when it's time for lovin' they're better than $5,500 hookers.

and yet again, CNN Money shines down their infintie investing wisdom on the ignorant masses.
Their next article: Why Bonds Are Good for Old People

This is only true if the stocks you invested in were appropriately valued when you first purchased them.

Before the "crash", Google was around $800. Now, it's $450 and change. So if purchased when it was $800 and saw it dip, it was better to sell and then re-buy it now.

That's what happened to me. I cought it in time too.

If you have a 401k, the best thing to do is not look at it, especially when the market is bad. Your goal should be to achieve a reasonable return over the long term. The 20% dips don't last just as the 20% increases don't. I paid a financial planner to find the right mix of investments to put into mine and I just let it ride. I'm sure at some point I will revisit that mix.

-@A.W.E.S.O.M.-O:

By looking at the economy in general and at the trends. Record highs in the market+Overheated unaffordable housing market+weak job market+increasing energy costs= downward market trend.
I expect that this quarter's economic numbers will show us in a recession. We will have an ugly 2008, and the start of next year things will start picking up. I am planning to get back in towards the end of the year when I expect that we will be near market bottom.

This market has only begun to drop. Why should I hold on to my stock when I know the Dow is going to drop AT LEAST another 3000-4000 points.

The problem with these "experts" is that while they are tell YOU to "hold on and ride it out" because in 30 years you'll be up 7-9%, they are SHORTING your stocks that they are telling you to hold on to and then buying back low and are making 300% profit... but don't worry... just ride it out and everything will be JUST FINE.

@Whitey Fisk: The best thing to do for your 401K is to move ALL YOUR MONEY INTO BONDS!

@starrion: I think you need to read up on Random Walk before you make any more investment decisions. You see, you are not the only person who sees a recession and a weak job market and a bad housing market. That is not insider information. Everyone knows that. That means that everyone else who foresees the same events as you will act accordingly and price stocks in anticipation. Nobody can time the market. Not you, not anybody. Anyone who claims otherwise is lying or lucky.

@starrion: You think you're the only one who sees a downturn in the housing and jobs market? That's not insider information. Everyone knows that. And everyone else who expects what you expect will price stocks accordingly. Read up on "random walk" before you make any important investment decisions. Nobody can time the market. Nobody. Anyone who says otherwise is lying or extremely lucky.

Damn, I thought that my first comment had disappeared and then retyped the whole thing.

@coss3n:
It works great in a falling market. It is not advisable if you have a lump sum to invest and the market is likely to rise. So in the case of a 401-K in the current market I believe it is a good idea.

@Aladdyn:

Are you sure? My broker's always telling me, "Buy high, sell low." Maybe I need a new broker.

Sell HIGH. Duh.

1966 - Dow at 1000, Gold at 35, oil single digits. 1980, Dow under 1000, gold at 800, oil at 100.

20 year time horizon? Gold is back over 800 too.

From 1929, it was the mid-1950s before people broke even.

There will be a reversion to the mean. The market can't (collectively as in index funds) grow faster than GDP or population or such things.

The Nasdaq (both composite and 100) were well north of 5000. They are less than 1/2 that today. And you need a 100% gain to make up a 50% loss.

Did anyone tell you to go into Gold at 450?

Exit now. If it goes up 10%, you've missed one year. If it goes down 30%, you can buy at the bottom and get the 50% gain when it returns.
Or at least for three months, or until next fall (sell in may and go away) when the Federal Reserve has undone all the emergency measures. If they have the firehoses on, maybe you should exit the building until THEY call "all clear".

One simple "never wrong" indicator is when the 20 week moving average is 1% below the 50 week moving average, sell, if it crosses back over, buy. It just gave a sell (go to cash) signal. It was correct for the last 20 years. You would have missed the drop from 2000 through 2003 - you would have sold the SPX around 1450 and bought back around 900 instead of, well, you have a small loss even now.

The worst part is what happens if we get a recession, the market is down 50%, and you have been out of a job for 6 months and your unemployment runs out and you MUST sell 50% down.

Housing never goes down? They said that too.

Is everyone pretending that stocks have nothing to do with the economy, employment, or consumer spending? That they just go up over the long term for no reason? Even if 20% of the homes have had for sale signs for several months? Even if banks with mortgages are in danger of not having enough capital and might fail? Even if Lehman and Bear Stearns might be insolvent? Even if consumers aren't getting the Latte's and latest fad clothing and gadgets?

If it isn't a hurricane, you are evacuating for no reason and can come back having lost a few months time. If it is a hurricane, you will lose your job AND your savings AND your retirement AND your house.

This is terrible advice; as others have pointed out, it starts from the erroneous assumption that stocks are cheap because they have fallen c15% from recent highs. Stocks were WAY overvalued then, and only slightly less overvalued now.

The advice also counts on markets generally recovering relatively quickly, in a couple of years if not months. Guess what? The Nikkei 225 peaked at the end of 1989 (18+ years ago) at over 38,000 and as of last night's close was 12,861. In other words, if you were a Japanese investor who said, 'no worries, I am in this thing for the long haul' back in 1989-1990, you would be looking at c65-70% losses (adjusted for meager dividends) in your retirement accounts today. Which would presumably mean a) later retirement; or b) shittier quality of life during retirement; or c) both.

And there is no law anywhere I know of saying the same cannot happen here.

If you are an investor, you should sell or even short stocks when you believe they are overvalued, and buy stocks when you think they are cheap.

And if you don't know the difference between overvalued and cheap stocks, you should own only CDs, and not risky assets.

(Stocks are risky assets, BTW)

D

And saying "I can't time the market" also means neither you nor I can tell what the value of any stock or index will be (inflation adjusted or not) one year from now, nor 20 years from now. Is it 1920 or 1929? 1966 or 1982? Or some other year?

If you are staying in, you too ARE timing the market - you are saying in X years you absolutely know the market will be Y% higher. If instead it is 30% or 50% lower? Can't happen? Because YOU can time the market?

They said it in Japan. Nikkei at 39,000 as of 12/31/1989. It hasn't been above 20,000 for 20 years. Japan is not a 3rd world economy and is in a growth region. And it is going down.

If I can't afford to lose the money, then I don't put it in stocks or mutual funds. That's what CDs and other deposit instruments are for. But if I'm saving for long term wealth, who cares what the market does in the next two years? I'll just buy more while its down and reap the reward. I don't obsess over making a 30% return, if I can average 12-15% over time, I still make myself a millionaire in 25 years with regular, consistent contributions, instead of trying to play the "sell now", "buy now" game. The most timing the average Joe needs to do is if they can tell the market is going down or is down, and they are planning to enter the market with a new mutual fund, wait till it shows signs of bottoming out just so you will have bought as low as possible.

I don't consider my investments to be the money I live on right now. Nor do most people. So I don't budget as if I am relying on that income. That's why people who are smart with their money and live within their means are able to withstand the ups and downs of the economy relatively unscathed.

If you're holding the stocks in a taxable account, one reason to sell is to capture a capital loss deduction to lower your taxes. If you want to avoid market timing, make it a paired trade, i.e. sell a loser and buy something else soon after. Make sure the something else that you buy is not identical to what you're selling in order to avoid IRS wash sale rules.

return OF capital is a lot more urgent than return ON capital in a tanking economy.

and pay off yer damned debts.

I moved all mine to Bonds at 13,500+ Waiting for it to drop some more before I jump back in. Cant time it everytime, but once in a while you just get lucky...lol

@Corydon:

On the other hand, what about new 401k contributions?

@fhic: And as evidence of my "don't trust anyone" strategy, I offer the comments attached to this post so far: everything from BUY BUY BUY!! to "start hoarding gold and canned goods for the coming apocalypse." :-)

Buy on Bad News. Let the hysteria drive prices down, buy, then hold until the hysteria subsides...

I look at times like this as "Stocks on Clearance!!" Of course, the trick is to know when they're "95% off" and not just "40% off"

@yetiwisdom: well, that's it innit? timing is hard.

brokers and mutual-fund companies OF COURSE want you invested at all times in their products because that's how they make their money (look at "expense ratio" for one example of fees nobody thinks about) and they'll say and do anything to keep you out of fee-less things like Treasury bonds and money markets. so-called "dollar-cost averaging" works OK when you're just starting a 401k, but reducing your existing holdings 25-50% doesn't help anyone.

and remember, people who were hit hard in the tech crash, assuming they changed nothing, are still upside-down six years later.

hmmm... I'm mixed on this.

I'm considering moving some of my existing TSP funds into more conservative funds for a few months. I'm not however, changing my new purchasing distro.

Writing is on the wall that this recession will be worse than the last few.

Still, the stock market can be fickle and move in unexpected directions. Thus, I'm leaving the bulk of my portfolio in the market and continuing to buy DCA with no distro changes. My time horizon is still 20+ years off, so I'm not overly worried.

I'd say we've got another month or so of stock market craziness (downward) before it plateaus for a while.

As for Google, I bought at $395 and sold at $585... I was pissed when it went up to $800... not so pissed now.

Just my 2 cents.