Monday, September 29, 2008

5 Reasons Not to Bail on the Stock Market

These days fear is king and folks are fleeing the market in droves. You would think that the world is coming to an end, and while I agree that the situation is extremely serious, and yes, even scary and possibly without precedent, I am holding firm to our stock positions. Here are my top five reasons:

1. I am no brilliant investor (and neither are you) - I simply recognize that I don't know enough about investing to make the right call about bolting or staying in the market. Making a gut decision to flee has no better chance of proving the correct way to go than making the decision to wait out the storm. Most people simply have no idea which direction the market will move next week, never mind about next year. I am one of them. However, I know that over the long haul, I am better off staying put.

2. It's expensive to run - if you have been investing systematically for a number of years, it is very possible that like me your stocks have made money, even with the large recent declines. Selling your positions will trigger a capital gains liability, so running has an immediate cost impact. I for one would rather not pay Uncle Sam any more than is absolutely necessary.

3. Long Term Plan - I am confident in our long term financial plan, and our asset allocation is such that I am psychologically willing and able to withstand the declines without changing my strategy. If you are feeling an irresistible pressure to change your investing strategy, you may have built a portfolio whose risk profile exceeds your tolerance for risk. That's actually a good reason to make some changes in your portfolio, but you may want to do that in calmer times, rather than in the middle of a financial storm.

4. Warren Buffett - Buffett has been quoted as saying:
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." 
In fact, he is as good as his word. Just as the turmoil in the financial markets appeared to reach new heights, Buffett stepped in with a $5 billion investment in Goldman-Sachs. That man sure knows how to buy on the cheap. That's not to say that he is guaranteed to make money on his investment, only that it's probably better to move in the opposite direction as the rest of the herd... 

5. What is Safe? - if anyone can show me which investments are safe these days, I would be much obliged. When even money market funds can lose money, and short term treasuries can offer zero returns is there a safe investment left? Oil declined by 30% in recent weeks, gold is swinging around without direction, and are you absolutely certain that your bond funds are not carrying any toxic credit default swaps that could mean big losses? To be honest with you, I am more worried about the stability of the Dollar with the massive new amounts of debt taken-on by our government. Essentially, with danger in all directions, where exactly am I to flee to?

The bottom line: I am sticking with our well diversified portfolio. We have a healthy balance of stocks, bonds, real-estate and cash. Our investment horizon is decades long and our short term cash needs are protected

Batten down the hatches, put on your fancy yellow storm jackets, and steady as she goes!

4 comments:

frugal zeitgeist said...

Could not agree more (but I still need a bucket).

Madame X said...

well said, cap'n!

Shadox said...

Arrr ye land lubbers! Can I have that bucket for a couple of minutes? I feel a spate of uncontrolable hurling coming on...

andy said...

Sage advice that needs to be repeated like a mantra in times like we face now. I did sell one stock that I felt was going to get clobbered in the economic downturn, but overall am holding on. Still maxing my 401K so hopefully long term, things turn out okay