Resist the Urge to Cash Out
When your goal is 20 years away, stand your ground.
By Laura Cohn, Associate Editor
From Kiplinger's Personal Finance magazine, June 2009
- Comments
- Email This Article
- Print This Article
- Order a Reprint
Advertisement
OUR READER
WHO: Matt Nelson, 39
WHERE: Atlanta
QUESTION: Should he keep most of his retirement money in stocks, or move it to a money fund?
After suffering through the great bear market, Matt can't help but wonder if he's doing all he can to maximize his retirement savings.
The father of 5-year-old twin daughters, Hadley and Sutton, Matt has several retirement accounts, including a 401(k), a rollover IRA and a Roth IRA. He and his wife, Jenny, have saved close to $200,000. But Matt, director of financial planning and analysis at Cox Enterprises, a giant national cable company, worries that he won't have enough to exit the workforce when he wants -- at age 60.
"The direction of the market is troubling," he says. "For months, I watched my nest egg shrink every day." In March and early April, he and other investors finally caught a few breaks.
Like many people, Matt is still worried about keeping most of his retirement stake in stocks. So, while he continues to contribute new money to stock funds in his 401(k), he's considering moving to cash the $200,000 he and Jenny have already saved -- in essence, starting a new stock-fund allocation from zero.
Matt doesn't see this as trying to time the market -- although it is. "If I miss a bounce, I'll be kicking myself," he says. Fortunately, he didn't miss the March-April rebound. If he had, he'd have missed out on perhaps $30,000 in gains -- serious money.
That's why Matt should keep his investments in place. It's natural to second-guess yourself after Standard & Poor's 500-stock index loses 57%, as it did from peak to trough. But it's unwise to redo your portfolio in a knee-jerk fashion. "It has been a tough period, but this happens every 15 to 20 years," says Don Humphreys, president of Voyager Wealth Management, in Harrington Park, N.J. "This is the worst time to be selling because we're at the bottom."
It's nearly impossible to guess market swings in the short run. If Matt were to give up, there's no guarantee he'd be better off in bonds or real estate. In fact, history shows that stocks outperform bonds over time. Even with the huge drop from October 2007 through March 2009, T. Rowe Price calculates that over rolling 20-year periods since 1926, stocks have returned 11% annually, on average. Money-market funds? Just 4%.
Matt also has time to recoup his losses. Price advises that investors close to age 40 should have 90% to 100% of their retirement kitty in stocks. Cautious advisers would say 75%. Almost none would suggest that Matt zero out his stock allocation. To gauge his plan, Matt can use the retirement calculator at Kiplinger.com.
Stuart Ritter, a financial planner at T. Rowe Price, likens Matt's desire for drastic action to that of a soccer goalie who jumps to one side of the goal to block a penalty kick. Research shows that although goalies jump 94% of the time, they'd be better off sticking to the middle. The trouble is, a "bias for action" takes over.
It's the same with investing. Unfortunately, "we don't know what the future holds," says Ritter. "To be sure of your investments, do the same thing you should do in soccer: Stay focused on your position."
- Comments
- RSS
Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy
Reader Comments (9)
Posted by: Brian in Minneapolis at 06/03/2009 08:47:40 AM
Your quoted expert Don Humphreys says, "It has been a tough period, but this happens every 15 to 20 years." But what does NOT happen every 15 to 20 years is the collapse of history's most gargantuan credit bubble. This fiasco is a long way from being over, and government "help" will only prolong the market misery.
Posted by: SteveTheHawk at 06/03/2009 11:48:17 AM
Sorry, but I'm not buying the advice that's being dispensed. In late 2007 / early 2008, I moved a large percentage of my 401K to cash (Stable Value). Guess what? I'm down about 15% from top, compared to many of the funds in the plan that are down 40 - 50%. Missing the rebound? Nope. I haven't missed anything yet. All the funds that dropped 50% have rebounded about 30%. They still have another 70% to go before they get back to where they once were. I'm going to start moving slowly back into the market, but it will be very slowly. I have zero trust in the market and its institutions. I have yet to see any reason to think a great economy is coming. Call it market timing if you want. I call it capital preservation.
Posted by: PaulB in Boston at 06/03/2009 03:17:59 PM
A few thoughts relative to comments by SteveTheHawk. You are misleading yourself when making statements like, "I haven't missed anything yet.". Of course you have. You had the opportunity to gain 30% on your money had you been in the market. ANYONE not invested in the last three months has missed out on a chance to add 30% to their portfolio. Fact. Let's not forget the market could have moved up after you moved to cash. You picked the right time to get out. Kudos for that. But many other people cashed out in 2005, 2006, and 2007 and "missed" all the gains of those years. (And of course, unless they got back in, they avoided the losses inflicted in 2008). But you didn't pick the right time to get back in. You could have made 30% and gotten out again and preserved even more capital... :-) Last, there is mistake in the math regarding "..getting back to where they once were". if a stock is worth $100 and drops 50% and then rises 30%, the stock is now worth $65 (($50 +(.30 x 50)). To get back to the starting value of $100, the stock has to rise $35 or 54%, not 70%. (65 x 1.54 = 100) or ($35 /$ 65 = .54).
Posted by: Hudey at 06/03/2009 03:43:33 PM
This downturn is far from over, and the stock market is far from safe. I'm on the sidelines until I see the real correction that started early this year but was artificially reversed by the Fed printing presses. I'm confident the Dow will have to return to sub-6500 before any real progress is made.
Posted by: Sean at 06/03/2009 04:06:23 PM
No one should claim they know that the market has hit bottom and therefore that you should stay invested. People who bought and held the Nikkei since 1985 have not broken even. People who bought near the peak in 1929 didn't break even until 1955. In either case, someone at age 40 would have a hard time retiring at age 65 based on those investments. Recently it was shown that over the last 40 years, bonds have outperformed stocks. Don't use simple past performance examples to argue someone should buy and hold equities.
Posted by: David at 06/03/2009 11:37:10 PM
Anyone in the Stock Market right now should be a smart investor, as the days of buy and hold, might be over! The Market timers who take a lot of flack for sometimes underperforming the SP500, for the most part were able to walk away from the recent Market crash with a 3 percent loss in 2008!
Posted by: SteveTheHawk at 06/04/2009 02:02:27 PM
Paul...I'm not misleading myself at all. Yes, I would have been up 30% in the last couple months had I stayed in the markets, BUT... I would still be way down from where I was. That's the true gauge. The real question is how much of what you have can you keep. From that perspective, I'm still way ahead of the market. And you can play the numbers any way you want. When I refer to the need for another 70% climb, I'm starting from the bottom of the market. If a fund drops 50%, it needs to climb 100% to break even. If it goes up 30%, that means another 70% (from the bottom) to go.
Posted by: melvin at 06/04/2009 08:21:41 PM
I thought that past performance is not a guarantee of future performance; that investing in equities can result in loss of princial. Why then do you insist on telling us what T rowe Price and the rest of those vested in our putting money in the market tell us about old economies? We are entering a unique new world economy-our capital has been invested overseas, not in new businesses here that will employ workers. How GM goes, so goes the country--and does anyone predict that GM will do well for the next 29 years? Hell, no one predicts success in the next 5 year4s!
Posted by: PaulB in Boston at 06/08/2009 11:58:57 PM
StevetheHawk - If you really believe your statement, "The real question is how much of what you have can you keep.", by definition you should not be in the stock market. You can keep ALL of it by staying in cash. Forever. You'll keep everything, lose nothing, and answer your own question by saying "I kept 100% of my money." Otherwise, you're timing. And that has NEVER proven to be a winning strategy. If you wait until markets rally back your stated 70% to get back to "even" and then invest, you'll be going into the market right after a 100% gain. Can't think of too many timers who would advocate that as a strategy. If you intend to head back into the markets at some point before getting back to "even", then you should have started three months ago and rode that 30% wave. That's obvious. Why start now, AFTER the market is up 30%? Will you wait and see if the market goes up another 25% before getting back in? What if you get in now and the markets give the 30% back? Alas, you would have a bad answer to your goal of "keeping what you have". Which, of course, is the point. No one can consistently predict the direction of the market. If you are a trader, try and time things. If you are an investor, you need to hold good companies for the long term, even through the bad times. You might even consider buying more stock in good companies when their share prices have been trampled by timers...