Before you pull the trigger…
Nov 24 2008
For all you working people it has hit epidemic proportions. People ready to sell their stock mutual funds in their retirement accounts. Before you do, stop and consider these quick points.
Don’t let emotions dictate your investment strategy. If you are ready to sell, you are making a decision based on fear, depression, or despair. Emotions will kill your returns and your retirement account over time. It’s not the market that hurts you; it’s you and your lack of a rational investment plan. The market does exactly what we know it will do; go up and down. You have to live by a plan that exploits that very fact of life.
Markets always have and always will go up and down. The economy overheats and then it will deflate to cool things down. Once the economy cools down, it will heat up again. Glitches work themselves out whether it’s a credit crisis or a “dot-com” bubble or runaway inflation; whatever. We are human. We make mistakes. We fix them. We live to fight and succeed another day.
Buy low. Buying low sucks—get over it for your own good. To buy low means you have the guts to trudge on when things are their darkest. Wealthy people get wealthy because they buy at the right times—they pick up other peoples’ assets a bargain basement prices. They buy when others see pain and they see opportunities.
You are buying low when you invest regular amounts at regular intervals through payroll deduction. Your regular contribution is raking in shares at bargain basement prices right now. Concentrate on the shares, not the value. The game is about owning the most at this point, not your value. Your value only starts to matter when you are closer to needing the money—5 to 10 years out.
If you are raking in more assets at sale prices, don’t you want to be raking in the types of shares that will increase in value the most over time? Every down stock market provides opportunities for us to buy more long-term appreciable assets than average income people normally get a chance to buy due to our limited investment abilities. Five years from now you’ll kick yourself for not having found a way to buy more shares of stock mutual funds back in 2008.
Over the long haul, stocks have averaged the greatest returns of any other assets. People of average means must have their investments work harder (earn more) in order to build enough wealth to retire. “Safe, conservative, and secure” doesn’t return enough to build wealth. Conservative assets don’t have the returns necessary to stay ahead of taxes and inflation.
You have to be “in the market” to get the better returns. If you move your retirement assets in and out of the stock market based on emotion, you miss the times in the market that provide the greatest returns. The greatest returns are typically as the market rebounds off the bottom. If you aren’t there, you miss it. You can’t afford to miss the rebounds.
Buying loads of shares at the market bottoms means you are averaging down your “per-share” costs. You average down your per-share costs as you buy more and more shares at cheaper prices. When the market returns, it takes less increase to break even and go on to even higher levels.
As a working person still accumulating shares, I wouldn’t mind for the market to stay down a few more years. Let me rake in the maximum number of stock mutual fund shares at depressed prices. When the market rebounds, yeeee-haw!
Makes a lot of sense, but overlooks opportunity of “harvesting losses” for income tax reporting purposes and then reinvesting after 30-day, wash-rule period expires.
Nice for the individual who is still in the earning years of his life.
Not so, for those who accumulated what they could during their working years, to a point where retirement became feasible, only to have, after reaching an age where employment is difficult to say the least (the over 70s), their nest eggs destroyed by irrational CEOs, and greedy politicians who took Fannie’s and Freddy’s money to assure that these two mismanaged entities would continue unscathed.
I must agree with mister Williams.
Mr. Ostrum may be a great financial planner but a gifted writer he is not.
This article leaves me cold.
If I were a school teacher, I would have the student diagram the article to try to determine what it was he is trying to say.
As it is, it’s just a bunch of ramblings.
Maybe Steve Strowbridge can give him some lessons in writing.
I am sorry, but I disagree to a point.
Certainly, when the market makes small adjustments, one should stay the course, continue the plan, and have confidence.
When the market and the investments continue to lose for a year and then look to be headed for the tank, it is high time to bail, head for safer ground, and ride out the storm.
This requires some nerve – it’s not for the faint of heart. You could miss. It is a bit of a gamble. But, failing to move could mean 15 or more years to build back up to where you were when you should have bailed.
This strategy requires a modest degree of attention and action on the investor’s part. Money will not reinvest at the right time because it is supposed to do so. You have to do something to cause it to jump back into a market that has bottomed out.
If you jump back early, do not panic. You simply bought a little early. You are near the bottom, hang tough.
The advice of the article is the advice of people of earn their living investing other people’s money, not their own. It is the advice of the fund managers who do not want to see their funds’ values drop even further when you bail.
The advice of the article may be useful if the investment or fund is traditionally conservative, however, remember, some of the best banks are going on the block now because they drank the Kool Aid, when they should have stayed small and continued to do what made them strong.
I hung with the funds that should be rock solid and are looking sickly now, because good investment logic says they must recover, but I bailed on the speculative, risky, high-growth oriented funds at the last minute to avoid losing even more than this miserable year lost. I should have figured the overseas-based funds to tank at the same time. Instead, I was a day late and it cost me $20k. That’s right, one day. I could have sold and parked early, but I guessed wrong. If I still had it today, I’d be down $70k or more — no longer a nest egg, just a rotten egg.
Let’s get real with the advice we give folks, particularly those of us who are using or close to needing to use that proverbial nest egg.
I agree with JW. And another factor the “dollar cost averaging/don’t panic” methodology/advice doesn’t take into account is those who can no longer contribute to the particular investment in question – an inherited IRA, for example, or a TSP when one has retired. There is no advantage that I can think of to watching the value plumment from month to month…it will never regain its value to what it was a year ago in my lifetime.
Concur with John Williams – and also with the author’s recommended “buy low” theory. So, how about a few hints on exactly how to identify those bargain, likely to grow, stocks.
Thank you for your readership and participation. Because financial advice is not an exact science, it’s good to hear other views–even if we don’t agree.
When I worked as an investment advisor, I had to put food on the table and sales-marketing was 90% of the business. Now I don’t sell products and I don’t have clients. I don’t make my living investing other people’s money. One thing you can count on with me, I’m completely about the education. No spin or products pushed here.
I have to keep in mind our financially diverse audience when writing and realize most folks are not active managers of their accounts. I try to provide info that may apply to most people. This usually prevents me from being too technical or getting into the details. For a blog, my comments tend to be long as it is.
When writing about a topic as complex as investments in a blog, it is easy to leave a lot open to interpretation. My belief is that to be best understood I need to be concise, direct, and maybe even a bit blunt. It not meant to talk down or be aggressive, just precisely understood. Thanks for your support…Shane
P.S. Company or stock analysis is not my strong suit. Besides all the pros have their own methods for valuing a bargain investment. I’ll leave that topic for books.
Herb makes a good point.
By harvesting losses you can use the losses to offset any capital gains you may have. In fact, an individual taxpayer can even use $3,000 more in capital losses than they have in available capital gains. Any additional losses are carried over to be applied in subsequent tax years.
Jonathan
TaxProSolutions.com
[...] • The Average Investor, Part 1, Part 2, Part 3, Part 4. • In a Bear Market • Market in Perspective • Before You Pull the Trigger [...]