This article begins with a disclaimer: Nothing you are about to read is intended as investment advice, nor should you take it as such.
Over the last 18 months the stock market has declined more than 20% in value, with some sectors declining much more. With a substantial chunk of retirement funds tied up in the market the effect has trickled down to ordinary investors like you and me. No longer is a dip in the stock market felt only by the big boys.
Many employer-sponsored retirement plans now offer a range of self-directed investment options, typically among a choice of well-known mutual funds offered by companies like Merrill Lynch, Vanguard, T. Rowe Price and other familiar names. When the market was going up like the Space Shuttle nobody complained, but now ordinary folks are afraid to even open their retirement account statements. Those who do are often shocked by the decline over the last two years and many are wondering whether it is time to switch investment vehicles to something less exposed to loss of principal. Is it time to get out of the stock market and move that money into bonds or money market funds?
Here is some food for thought: If you have a retirement fund invested in solid blue chip companies, who happen to be down on their game at the moment, there is sound historical precedent to suggest that these investments will recover their losses more quickly than they can be recovered through the paltry earnings paid by money funds and similar investments. By moving out of stocks and into money funds now you are surely locking in your losses and will recoup them slowly (sometimes very slowly) in the money market. On the other hand, if the market has hit bottom, or close to it, there is a reasonable chance that recent losses will be recouped more quickly by those stock funds as the market comes back.
Old line blue chip companies aren’t going anywhere. General Electric is not going to stop making toasters and consumers are not going to stop buying them. History suggests that it is only a matter of time before the market recovers: the important question is whether you can wait.
If retirement is a long way off, the current dip in the stock market will probably end up looking like the “crash” of 1987, which most of us hardly remember. One of the largest dips in stock market history was erased and replaced by substantial gains over the long term. Those who stayed with the market then did quite nicely in later years. If you can wait it out, history suggests that the market will ultimately reward. If, on the other hand, retirement is right around the corner, it might not be the best time to be relying upon the market cycle to bail you out.
Each investor must evaluate carefully his or her investment goals and relate those goals to his or her own particular time frame. Rather than switch completely out of the market, perhaps a more moderate partial reallocation of risk is in order. Moderation and balance are critical components to a successful investment strategy, avoiding extremes whenever possible. (Remember the tortoise and the hare?)
— Kevin Palmer