Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

06/19/2008
Should I pull out of the stock market when the going gets tough?
"I'm finally at a point in my life where 10 to 15% of my income can be invested, which I've been doing for a couple of years. And I'm very grateful to have reached that point in my life, but the market is pretty bad right now, and every quarter when I get my statement, instead of making money, I'm losing money. My initial gut reaction is to pull out, but some people have said, 'Well you've got to stay in'. Staying in sounds good in the long term if it's going to make it up. I just don't see that losing money every month for the last year is really the best option for me. I would like to pull out, but I don't know what options I should go into.

Should I just start putting it into CDs or into a savings account, which isn't going to give me as much interest as playing the market? If you have any suggestions, I'd be very appreciative to hear them."
Ellen Hoffman:
expert info »
The questioner does not mention what the losing investments were. Her telling comment, however, is about "playing the market." Most financial experts say that, unless you are truly knowledgeable and willing to take the time to analyze them thoroughly in advance, you should not invest your retirement savings in individual stocks. So if the questioner was doing this, it's probably time to look for mutual funds or other more conservative investments for the future. If the questioner is invested in mutual funds, index funds and the like, and really has been losing money consistently for a year, she should seek some advice to help her make better choices.

Diversification is important, so the answer will not be to put all the money into any one thing. CD's and savings accounts rarely keep up with inflation, and although they may be a part of the portfolio, should not make up the total. The bottom line is that this person should try to get some objective help from a qualified, trusted expert who can provide some education as well as advice to get the portfolio into more profitable, less risky condition. And if "playing the market" meant going in and out of investment positions on a frequent basis, the other good strategy would be --once the portfolio has been readjusted to contain investments with less long-term risk--to resist the temptation to do a lot of trading.
Jeff Kyle:
expert info »
This question is a great question & quite complex! Without doing a thorough
Insurance, Financial, Tax & Estate Planning analysis of what your total current picture looks like & knowing exactly what it is you want to accomplish, there's no way to responsibly answer this question! I will, however, simply let you know that there are options to help you "stop the bleeding"! Some of those options would be to not continue putting money into products with market risk and fund other vehicles that are safe, fixed (interest rates) and insured...such as Permanent Life Insurance (Tax-deferred savings), Tax Deferred Fixed Annuities, CD's (not tax deferred unless it is an IRA), Money market Savings Account (not tax deferred) to name some of the more popular & effective ways to get some safety in your savings.

Also know that some of the products listed above do have limited surrender charges, so your money may not be accessible for years. Hope this helps.
Alyssa Rakovich:
expert info »
Depends on your time frame and what the purpose is for the money!

There are 5 simple rules to investing. If you follow them you should be successful.

1. Use Professional Management
2. Invest in Quality
3. Diversify
4. Add to your investments
5. Give your investments Time


Buy low and sell high. Investing is unlike anything else as far as human nature is concerned. Most people decide to buy items when they are on sale - except if they are the greatest companies in America. The greatest companies go on sale and nobody wants them!

Dollar cost averaging is a way to invest buying in a little bit at a time. The key is buying low. When you buy low you can afford to buy more shares at a lower price - right now. If you are in an accumulation stage, the key is to accumulate as many shares as possible at the lowest price. Sure you want the value to increase over time. I hope this is helpful. An advisor's job is to be a coach, and as a coach, you help get people to do what they need to do most when they least want to do it!
DeAnna Klokkenga CFP ® :
expert info »
What you’re feeling is a common emotion of individual investors. Periods of falling prices are a natural and healthy part of investing in the stock market. Professional advice navigating through these times is highly suggested, as well as adopting an asset allocation policy based on your risk parameters. If your initial gut reaction is to pull out, perhaps you should re-evaluate your risk tolerance.

Pulling out altogether may prove to be costly. For example, an individual who invested $10,000 and remained invested for the entire time period of Dec. 31, 1996 to Dec. 31, 2006 would have accumulated $22,451, while an investor who missed just five of the top-performing days during that same period would have accumulated only $17,366.

Investors have become accustomed to strong and consistent stock market gains over the past 5yrs (2001-2006), A period of sustained falling stock prices is not easy to deal with. Many investors react to a drop in prices by panic selling. Emotions take over. Other investors see these
times as an opportunity to review the risks in their portfolios and make adjustments where necessary. Perhaps the most important thing to keep in mind during a market downturn is long-term perspective. If these monies are for retirement or something in the time frame of 10-15 years, over the long run, despite several down cycles, stock prices have risen steadily
over time, and equities have had the best performance of any investment over the long run.

Remember, all investments involve risk. Deciding how much risk you’re willing to take is a personal decision, based on several factors, including: time frame, risk tolerance and individual goals. As a long-term investor, you can afford to ignore short-term price changes. Market risk is common in all investments. You can reduce your market risk by allocating part of your portfolio to other assets such as CDs, bonds or bond mutual funds and Treasury bills. When stock prices
decline, it is possible to cushion the fall with a diversified portfolio.
Lynn Anne Gillen, CIMA® :
expert info »
There are several things to consider for this person.

First, it is wonderful the person is saving a solid portion of her income. She must understand the market goes through cycles. There will be times she does not make any money and will lose money. If she has at least 7 years before she will need the funds, then her best option is to
ride out the cycles, because, over time, the market does make money for people and grows faster than inflation. There are many resources on the internet that show the history of the stock market.

Secondly, she should look at how aggressively she has arranged her funds. Even with a long-term time horizon, the funds should not be 100% equities--perhaps only 80% or 70%--and the rest in bond funds, which would make it easier to ride out the ups and downs of the market. Among the equity funds, she should have a variety. If this is through an employer-sponsored retirement plan, there is someone to help her pick the best allocation for her situation.

Thirdly, this person may be more comfortable with market cycles if she is also working to establish an emergency fund of several months of living expenses in a savings account. Knowing she has cash to access quickly will help with maintaining a long-term perspective.
Gary Silverman, CFP®:
expert info »
Yours is a very normal reaction to a declining market, especially for someone new to investing.

First let's look at this logically. If you were looking at a time to buy into a market that you know is good for the "long-term," the best time is when it is down. The time to be cautious is when the market has been hitting new highs every month. It's the old "buy low, sell high" principle of making money.

Now let's look at this emotionally (like a normal human does). The market goes down when people get scared. The more people get scared, the more it goes down. So if you are feeling a bit scared that your money will keep going down, then you are normal. That doesn't mean that pulling it out is the best choice, however. In fact the less normal you are, the better you'll probably do with your investments.

Of course, you could be in a bunch of lousy investments. There's no way for me to know this. But know that the above happens to people no matter what their portfolio looks like.

To take some of the fear out of the market, you should have your financial advisor discuss the risks of each investment you have and that the portfolio overall is exposed to. Risk is not bad, unless it causes you more fear than you can stand and makes you jump out of the market at the wrong time. Hopefully, your advisor has questioned you about [your risk tolerance] and perhaps given you a risk tolerance test to ensure that you are not put into investments that you can't yet handle.

If you don't have an advisor, then you must do the educating of yourself and find your own tolerance for risk. Most large no-load mutual fund companies have resources available online that will help you with this.
Rachel Lane, CFP:
expert info »
What is her time horizon for needing the funds? Is retirement 5, 10, 15 or 20 years away? If she may need those funds within the next 2-5 years, money markets, CDs, and short-term bond funds may indeed be appropriate for her right now. If not, she could invest for the long term with a diversified mix of stocks, bonds, domestic and international, as well as some alternative investments. I would ask her some powerful risk tolerance questions to determine an appropriate mix and provide her with some financial education, pointing out how markets have performed over long periods of time.
Sharon P. Hardy, CFE:
expert info »
Prudent investment strategy has always been one's personal investment risk tolerance and "stay ability" to well-thought out investment goals and objectives. It has never been about jumping in and out of the stock market, whichever way the wind seems to be blowing or when occasional "hiccups" occur within it; the stock market has always been and will continue to be very cyclical, depending on which internal and external forces impact it from day to day. It seems to me that in this present decade, the stock market has been much more volatile than most others that I personally can remember it to be.

My advice to someone who does not possess a lot of expertise in prudent investment strategy (like me) is to, as deemed necessary, seek out the advice and counsel of someone who does and is willing to provide it. Sometimes there could very well be a cost (if so, hopefully, it is nominal) associated with seeking this kind of counsel, but it well may be worth every penny paid for it.
Elizabeth Rusnak:
expert info »
The answer depends on your age.

If you are close to retirement, then you should adjust your investment accounts so that you are not investing in the higher-risk investments (because you need your money sooner, and you can't absorb the risk of these types of investments). A good financial planner can guide you, or the administrator for your [pension] plan can guide you. If you are 10 to 15 years away from retiring, then it's up to your risk tolerance of how you should invest. Either way you look at it, you should definitely invest in something. A traditional CD will not provide you with the rate of return that investment accounts would, even in today's market. Nonetheless, it’s always good to keep some type of liquid account available, so a money market account is good for that purpose. A well diversified portfolio is the key.

[Editor’s Note: One definition for a “liquid” asset can be found on the Web site of www.investopedia.com. There a “liquid asset” is defined as “an asset that can be converted into cash quickly and with minimal impact to the price received.”]
Michael A. Masiello:
expert info »
Great. You are starting to invest. A couple of points - realize I could go on for hours. First, identify your goals and objectives for investing, timeframes, and risk tolerance. Yes the market is down currently, but this is the best time to buy. It's on sale. Over time--and by that I mean long term, measured in years and decades not months and quarters--the general stock market has generated significant positive returns.

Depends on which #'s you use, but 8-12% return is fair. There are a number of charts and historical information to support this statement. You could try Callen, Ibbotson, Morningstar, or just call American funds at 800-421-9900 and ask for their ICA [Investment Company of America] brochure. They have a great visual mountain chart that will show you how the markets perform over time through good times and bad times. Keep the proper perspective. You are only losing if you cash in. Assuming you are reinvesting the dividends, you are buying shares at a lower monthly cost. Knowledge, strategy, and a long-term focus will help you. Hope this helps. Good Luck and keep going. Mike.
Editor's Note:
[Editor’s Note: Several of the respondents have mentioned seeking financial advice from a professional. One resource for finding a financial advisor is “Find a CFP Professional” on the Web site of the Financial Planning Association (FPA)—www.fpanet.org. There is also a link to the FPA Web site under “Financial Planning Association” under “Other Reputable Online Resources” under “Resource Center” on the Wi$eUp home page—www.wiseupwomen.org. Also see the answers to the question “When should I hire a financial advisor, and how do I find one?” under the “Expert Q&A Archive” on the Wi$e Up Web site.]
 

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