Should I jump ship from my Vanguard mutual funds account?

September 16, 2008 8:03 AM

Should I pull my money out of the stock market? I'm pretty clueless.

Well, it seems we are facing the largest plunge on the stock market since 9/11. And I'm pretty clueless about the stock market in general, which is why I am seeking your superior knowledge.

In May of 2007, when I graduated college, I invested $3,000 in a Vanguard mutual fund (symbol VFINX). I've only lost money since then, and its sunk down to about $2300. For me, $700 is a lot of money. That's like half a paycheck!

Should I pull the money out and put it in a CD? Or just keep it in there and wait for things to turn around?

posted by metamush to work & money (29 comments total)

All standard disclaimers apply (I'm not *a* financial advisor, and I'm definitely not yours).

Short answer: talk to a financial advisor

Longer, rambling answer:

We probably need some more info before being able to answer your question. If you just graduated from college, you're not near retirement age, so that money should be what you've stashed away for long term (10+ years) savings. If that's the case, the only way you actually lose money is if you sell. Markets go up, and markets go down. I'm still plowing money into my 401k and roth ira because, like you, i have a long, long (too long) way to go before retirement, and am confident that the market will rebound long before I need that money.

All that being said, if the money is something that you might need short term, you might want to consider something more stable, like a CD or something similar.
posted by um_maverick at 8:11 AM on September 16, 2008

You know how they say stocks are risky, but have higher returns? This is the risky part.

If you can't handle the risk of stocks, and it seems like you don't like that part, you should get into something more stable.
posted by smackfu at 8:12 AM on September 16, 2008

What's your investment horizon? Is this in a retirement account?

If you just graduated college you probably have plenty of time before you need this money. The Vanguard 500 is so well diversified already and the time you have on your side, my suggestion is to keep your money in. In fact, I would buy right now, if you have extra cash, because the market is so low.

The market will rebound. It might take months or years, but eventually it will rebound. If you sell now you lock in your loss. Try to keep emotions out of it and think of all your investments as long-term.
posted by blueplasticfish at 8:14 AM on September 16, 2008

What you're talking about doing is buying while the price is high and selling while the price is low. If you keep investing during the low ebbs of the investing cycle, you're getting more bang for your buck. If you only invest when the price is high, your potential profits are much lower.

I'd leave it in there and keep buying.
posted by Jupiter Jones at 8:14 AM on September 16, 2008 [3 favorites has favorites]

You could move it into a CD and get 4% back with little risk.
posted by damn dirty ape at 8:19 AM on September 16, 2008 [1 favorite has favorites]

Same answer as yesterday, only more so because your horizon is longer.
posted by justkevin at 8:19 AM on September 16, 2008

What everyone else said. It's really painful to watch your money do through these ups and downs (or in your case, only downs), but in the long run, it would make a lot more sense to just hold on and keep your money in the mutual fund. Unless you need the money in the next few years, sit tight.

BTW, I recommend checking out Suze Orman's book Young, Fabulous and Broke, which talks a lot about investment principles relating to younger investors.

That said, there is, of course, always a risk that you would never recoup your investment. But seriously, if that happened (given that you have a mutual fund, not $2300 in one company's stock), the economy would be in such deep trouble that your $2300 would be the least of your (and all of our) troubles.
posted by lunasol at 8:30 AM on September 16, 2008

Plus mutual funds have their own built in problems, mostly fee related and tax related. You might want to look into ETFs instead.

On the bright side, given your age, you've got years of financial improvement to look forward to and all that lovely compound interest. Don't worry too much about this recent setback- everyone got nailed. The market will fluctuate.

But start taking a serious look at personal finance web pages, books, magazines, comments by Mutant. Think of it as part of your job.
posted by IndigoJones at 8:31 AM on September 16, 2008 [1 favorite has favorites]

Buying high and selling low is the opposite of what you want to do to make money.

This is the time to buy, not sell.
posted by eas98 at 8:31 AM on September 16, 2008 [8 favorites has favorites]

You're just out of college. I'm assuming you're not planning on using that money for at least ten or fifteen years. The market will go back up by then. Don't worry about it. Unless your money is invested in a company that's going under, pulling it out when the whole market is down is just panicky behavior.

That said, you may want to check out index funds over a mutual fund--mutual funds tend to follow the market, while index funds tend to slightly outperform it.
posted by schroedinger at 8:32 AM on September 16, 2008

If you have money in a well diversified retirement account and you have 20+ years until retirement, the best thing you can do is simply stop worrying about the stock market. Take the market graph and your portfolio off your Yahoo / Google start page. Just stop watching it. This only applies to a nicely diversified investment. If you have your IRA in Google stock, that's a different issue.
posted by COD at 8:36 AM on September 16, 2008

I think you should leave it if it's earmarked for retirement. WHen you think of how many paycheques you have ahead of you, $700 is not that much, and it will probably rebound. WIth your future savings, start buying CDs to reduce your risk.
posted by Penelope at 8:36 AM on September 16, 2008

Do you expect you'll need the money in the next few years? Do you have an adequate emergency fund (I've seen six months' salary quoted as a rule of thumb) in a savings account? If the answer to these are no and yes, respectively, leave it in. The market will recover. When, I can't say, but leave it in long enough and the value of the fund will get back to its initial value and higher.

My portfolio lost several hundred dollars yesterday alone. While I cringe when I see that, I take a deep breath and remind myself that it has years to recover before I'll need it. I did make one trade yesterday: I bought more BAC. It's now underpriced and a good buy, IMO. Whether I'm right remains to be seen, of course, but that's how I feel.
posted by DevilsAdvocate at 8:38 AM on September 16, 2008

As everyone else is saying, losing a relatively large amount of a stock market investment during a short period of time is normal. That's why it's not a good investement if you actually need the money in a short period of time. In the long run though, the stock market has and will probably continue to beat all other forms of investments, including CDs.

In my opinion the best investment strategy for someone that doesn't want to learn a lot about investing is to do exactly what you've done (invest in a low cost stock market index fund) and just let it sit in an account. Especially if you invest a set amount every month/year.

If you just graduated from college, you're not near retirement age, so that money should be what you've stashed away for long term (10+ years) savings. If that's the case, the only way you actually lose money is if you sell.

The $700 has already been lost. Moving the remaining value to a different investment will not change that either way. The only thing that can be affected is future gains/losses.

You could move it into a CD and get 4% back with little risk.

With the greatly decreased risk also comes greatly decreased earnings. Don't forget that inflation (and possibly taxes depending on whether or not this is a retirement account) will make the earnings less than the already low 4%. Long term stock market gains have averaged around 9% per year, and that's including the effect of inflation. For short term investments, CDs are a very good and safe option though.
posted by burnmp3s at 8:43 AM on September 16, 2008

If you've invested in an index fund, then I'd keep it in there. Even though things are bleak right now, the market will rebound.

If this is money you needed fairly soon, then you can pull it out, but that $700 is gone forever if you do so.

For short term investments, I always go with a CD or a high interest savings account. It's much easier to pull the money out of those and you have more risk protection.
posted by reenum at 9:07 AM on September 16, 2008

Thanks. I am leaning towards keeping it in there. This is a long term investment. I'm only 23.
posted by metamush at 9:13 AM on September 16, 2008

The $700 has already been lost.

Remember that you are down, but you have not yet lost that money. Stock prices go up and down, but you haven't lost that money until you sell.
posted by mattbucher at 9:45 AM on September 16, 2008 [2 favorites has favorites]

That said, you may want to check out index funds over a mutual fund--mutual funds tend to follow the market, while index funds tend to slightly outperform it.

VFINX is an index fund. So you're good there. And yeah, you'd do best to keep your money in. There's no sense in buying high and selling low, especially when the market's bound to rebound. All my investments are currently down about $650 overall since I bought them, and $173 of that was just so far today ($161 of that being a big fall on the part of my own Vanguard fund). I'm not pulling out—in fact, I'm probably going to scoop up more undervalued stocks, either today or within the next few days.
posted by limeonaire at 9:46 AM on September 16, 2008

No. You should definitely not sell your fund just because it went down.

Talk to someone qualified if you're worried about it, but "buying high and selling low" is guaranteed to lose you money.
posted by meta_eli at 10:47 AM on September 16, 2008

What everyone said about above. Also, go to http://www.diehards.org. Read the faqs. Participate in the messageboards. These folks have forgotten more than I will ever know about investing. They are smart, and they are very knowledgable about Vanguard and its funds. Good luck.
posted by dudeman at 10:58 AM on September 16, 2008

Remember that you are down, but you have not yet lost that money. Stock prices go up and down, but you haven't lost that money until you sell.

Something that you own is worth $X less than it used to be worth, which as far as most people are concerned is a loss. And unlike most other kinds of transactions (such as selling a house at a loss) the amount of unrealized loss is explicitly known. The IRS doesn't consider it a loss on your taxes unless you sell it, but that is a technical aspect of tax law and doesn't have anything to do with the actual real-life definitions of gain and loss.

Thinking of unrealized losses as not being actual losses can lead to making poor decisions. Holding onto an investment to "avoid taking a loss" is almost always a bad reason, except in rare cases where a large tax savings can be found by carefully planning the timing of selling at a loss. There are many reasons to continue to hold an investment that is worth less than it was when you bought it, but an unrealized loss is still a loss.
posted by burnmp3s at 11:01 AM on September 16, 2008 [1 favorite has favorites]

Well here's a shocker. You would probably be hit with taxes on short term gains even if you took the money out. Mutual funds buy and sell stocks all the time, and when they make a profit it is calculated as a gain even though the overal fund may be down. As many have said you are young, with a long time for the money to grow. Buy low sell high isn't always a possibility, but selling low is always a bad idea (especially in mutual funds) The way to calculate how you are doing is the same way mutual funds calculate, by comparison to peers. Now the market as a whole is down X% The S&P 500 is down Y% and your fund is down Z%. if your Z is lower than X and especially Y (and / or your funds peers) then you should be satisfied that the fund is well managed.
posted by Gungho at 11:43 AM on September 16, 2008 [1 favorite has favorites]

eas98,

Buying high and selling low is the opposite of what you want to do to make money.

OK, I'm with you so far...

This is the time to buy, not sell.

...but here you go off the rails. You're gonna buy now? How do you know that the market won't sink further by the end of the week? You're sure this crisis is over? How do you know it won't stagnate for 3 weeks or 3 years? If investing were as easy as that, we'd all be rich.
posted by randomstriker at 12:20 PM on September 16, 2008

randomstriker,

That's basically the idea behind investing, according to Warren Buffett. If you keep buying when it is low, and you're investing in a generally sound product, it will go back up. You don't know WHEN it is going to go up - nobody does. But if you have a regular pattern of buying, you'll be getting a bigger bang for your buck and getting more of the fund while it is low. The idea being that you're investing in a generally sound product.

If you don't buy when it is low because it might go lower, you'll never buy... and then the next day when it is going up you'll have lost your chance. Keep it long term and it will go back up.

Stopping buying when it is low is a bad practice.
posted by Jupiter Jones at 12:45 PM on September 16, 2008

I don't have any money right now, randomstriker, but if I did, I'd be buying right now. Not individual stocks, but putting money into funds. Sure, the market may continue to go down for the next three years, but if you're in your 20s or 30s, you don't have to worry about that.
posted by lunasol at 2:14 PM on September 16, 2008

That said, you may want to check out index funds over a mutual fund--mutual funds tend to follow the market, while index funds tend to slightly outperform it.

I don't think you know what you're talking about. Besides the fact that VFINX is an index fund, index funds do follow the market. An index fund is just a type of mutual fund.
posted by entropic at 2:22 PM on September 16, 2008 [1 favorite has favorites]

You're gonna buy now? How do you know that the market won't sink further by the end of the week? You're sure this crisis is over? How do you know it won't stagnate for 3 weeks or 3 years? If investing were as easy as that, we'd all be rich.

As others have said, if you are going to need the money in 3 weeks or 3 years, you shouldn't be putting it in the stock market. The worst ever 3 year period for the S&P 500 index (which the OP's fund tracks) in the last 40 years was a 14.6% per-year loss. The worst ever 10 year period for the index was a 1.3% per-year gain. The best ever 10 year period was a 19.2% per-year gain. The average year was around a 12.3% gain. More details here. Future performance is not guaranteed to follow those trends, but in general the stock market goes up more than it goes down, even though in a period of months or years it can go down more than it goes up.

I disagree with the people who have said that now is the time to buy because prices are "low", because that is another way of saying that we are at the bottom. Next month could be the worst month in the history of the market, or it could be the best month in the history of the market. Nobody knows, and anyone who claims they do is either a liar or doesn't know how the stock market works.

Now is the time to buy because any time you have money that you want to invest long term, it's the time to buy. Investing in the stock market isn't like a sprint where getting out of the gates at the right time is the most important part, it's a marathon, where the key is to be patient and stick to your gameplan.
posted by burnmp3s at 2:37 PM on September 16, 2008 [1 favorite has favorites]

VFINX is an index fund. So you're good there.

Ha, I missed that part. OK, then.

entropic, the rule-of-thumb I'd heard is that mutual funds do about as well as the market, while index funds do a bit better.
posted by schroedinger at 5:49 AM on September 17, 2008

schroedinger, index funds are a type of mutual fund. maybe what you had in mind was "actively managed fund" instead of mutual fund.
posted by needled at 11:31 AM on September 19, 2008