One of my colleagues, a Ph.D. and senior executive in my company, told me yesterday that the economic situation has him so concerned that he is moving all his new contributions to his 401K to a stable, money market fund. He explained that he does not know what to do and is too stressed about the prospect of losing any more money. I can certainly understand the fear having lost about 22% of our stock portfolio's value since the year began two months ago. Nevertheless, what my colleague considers a defensive move is probably a bad financial error for the following two reasons:
Driving by Looking at the Rear View Mirror - if there was a right time to sell, it was probably before the economic meltdown began and stock prices went all to hell. Selling now is the equivalent of closing the barn doors after the cows have made their getaway. In fact, it's shutting the barn doors BECAUSE the cows have escaped. It makes no sense.
The Upside is Still There - I don't care what anyone says about the economic situation, this too shall pass. The stock market will not keep declining forever, and investing in stocks for the long term is a regular guy's best bet for ensuring his long term financial well being. Money markets may be stable, but they will certainly not beat inflation - the killer of financial security - over the long run.
Nonetheless, if you are so concerned about your finances that you are unable to sleep at night, are fighting over money or investment strategy with your spouse, or don't have a sound emergency fund to keep you afloat if you happen to lose your job or run into other trouble, even though this might not be the financially smart thing to do, you might be right to retreat to a safe haven anyway. In the end, its all about happiness. Money is not worth losing sleep over.
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