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Should You Abandon The Stock Market?

By: Investor Solutions

By: The Financial Planning Association

It wasn’t long ago that investors were lured by the siren song of instant riches in the bull market. Frenzied commentators and investors proclaimed that it was a new era for stocks, one that would never go down again.

Now all we hear are the stock whiners–in some cases the same people and publications that hyped stocks in the 1990s. Forget equities and switch to U.S. Treasuries and certificates of deposit, they warn. The bottom is nowhere in sight and we can’t trust companies to give us honest numbers, so stay out.

But just as investors have cruelly learned that stocks don’t return in the double digits every year, investors also need to learn that stocks don’t tumble forever, either. If you realize now there was a lot of hype about running with the bulls, why buy the hype about running with the bears?

The problem, say many CERTIFIED FINANCIAL PLANNER® professionals, is that investors tend to focus on the immediate past–”rear view mirror” investing– instead of adopting a long-term view–driving by looking out the front window. When stocks were booming, investors assumed they would always boom. When stocks began to slide, they feared they would slide forever.

Remember why you invested in the first place, say financial planners–or at least why you should have been investing. People should invest for longer-term goals such as college or retirement–not to buy a car in six months or go on an expensive vacation in a year. Long term should be at least five years away, and preferably ten years or more, say many planners. Time and asset diversification can help you ride out the inevitable downs that markets go through–even a long decline like the current market is experiencing.

Selling now would turn paper losses into real losses. In short, you could be selling out at the worst time. In some cases, selling losers might be a smart tax move because you can use the losses to offset other taxable income, but your tax benefit could be limited, so employ this strategy judiciously.

Financial planners say that when worried clients call and ask, should I sell my stocks, they often ask in return, “where will you put the money instead?” As of August 2002, bank money market accounts, which are protected from loss of principal but not from inflation, were paying only 1.8 percent, while a one-year certificate of deposit was paying around 2.4 percent, according to Bankrate.com. Two-year U.S. Treasury bonds were paying only 2.25 percent.

Of course, these rates probably look great next to a falling market. But bear markets don’t last forever, history and planners remind us. Many planners believe the market is near bottom if not already there, that it has wrung out the weakest investors. The market could decline still more, they concede, but it’s difficult to imagine that it will decline much further, having already lost over 40 percent from its high.

Even if the market doesn’t rebound for a while, it almost certainly will in time, and the only way to participate in that rebound is to stick with your investment plan. Investors who hold true to their investment plan will, in time, be able to recover at least some and perhaps all of their lost ground.

Furthermore, investors who continue to invest regularly during the low points will benefit even more when the market rebounds because they will have, in essence, been buying stocks and stock mutual funds on sale. Some planners are even advising clients with extra cash to use it to buy stocks because they consider stocks a bargain. The key, again, is to diversify investments and look long term.

Still, some investors may feel a strong urge to abandon the market, even after hanging on this long. Perhaps the thought of holding stocks is just too traumatizing, or the money may be needed for near-term goals (which shouldn’t have been invested for in the first place) and risking further decline may not be worth it. Some investors may need to sell some stocks in order to readjust their portfolio so that it better fits their financial needs or their previously established asset allocation. Talk to your financial planner, however, before committing to selling.

September 2002 – This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Frank Armstrong , a local member in good standing of the FPA.