When do we abandon the stock market (for investing)?

April 25, 2008 5:28 AM

So, we're in a recession. At what point should we pull our investments out of the stock market?

I know we're hearing from the media, analysts, and the powers that be that there is no problem and we will pull out of this. I've also heard the stories about how the same things were being said at the beginning of the great depression. I've got a Roth IRA that is entirely in the stock market. At what point do I move all that money to a safer investment and wait out the turmoil?

I've heard all the claims that this is the best time to invest because everything is cheaper, but I know that is only worthwhile if there is a rebound at some point. I'm not so sure anymore there will be a rebound.

posted by raddevon to work & money (30 comments total)

It took tens of years, but the market pulled out of the Great Depression, right? I'm no financial expert, but I'd say that if you need your money within the next couple of years, move it to something safer. If you aren't retiring for another 30 years, wait it out. The only people who make money when you try to time the market are the brokers with their commissions.
posted by hwyengr at 5:34 AM on April 25, 2008 [1 favorite]

Stop reading the newspaper.

Just like you will never read a story that says "249,999,992 people were not murdered today" you will never read a good news economy story. Before we had a "housing crisis" because housing was cheap, we had a "housing crisis" because housing was expensive.

Methinks that in the age of per click ads and shrinking readership margins, the news media has lost the willingness (ability?) to communicate in anything but shrieking hysteria. Thats before we talk about the political environment.

Nobody with any sense would pull long term investments just because the economy is going to contract for the next two quarters.
posted by mrbugsentry at 5:42 AM on April 25, 2008 [4 favorites]

If there isn't a rebound EVER, your investments will be the last of your worries. Unless you need the money soon, I wouldn't pull out. If you need your money soon, you should be moving into lower-risk investments anyway.
posted by selfnoise at 5:43 AM on April 25, 2008

If you were capable of successully predicting the short-term direction of the stock market, you'd be a professional investment manager. But you're not, and you're not. Your IRA is a retirement account. You should only be thinking about the long term. Leave your money in stocks.
posted by Perplexity at 5:44 AM on April 25, 2008 [2 favorites]

I've heard all the claims that this is the best time to invest because everything is cheaper, but I know that is only worthwhile if there is a rebound at some point. I'm not so sure anymore there will be a rebound.

You can worry all you want about what the short-term performance of the stock market will be, but for most people the best choice is to just buy an index fund (such as one that tracks the S&P 500 index) and keep it until you retire.

The most important part of investing is not buying and selling at the right times, it's investing in the right mix of things. If you invest in a wide range of publicly traded companies through an index fund, the only way you will lose money in the long term is if on average all of those companies combined lose money. If you invest for a long enough time the chance of that happening is extremely unlikely.
posted by burnmp3s at 5:55 AM on April 25, 2008

if you haven't already pulled out, you have missed that boat. your roth IRA is probably already way down and letting go now makes only sense if you think it won't recover at all. you take a loss when you think the company is going to declare chapter 11. your investment is most likely not going to default, so now you might as well ride it out until we are back in the blacks. start watching your portfolio more closely and move to bonds as soon as you get the first inclination of trouble in the economy if you want to play that game but don't think about selling when the fund is already five or ten percent down. that's a sucker bet. the idea is to buy cheaply and sell for profit, not vice versa.
posted by krautland at 6:01 AM on April 25, 2008 [1 favorite]

I'm certainly no professional and will readily admit that. Thanks for the input so far. If anyone else has insight, keep it coming. I'm still reading...
posted by raddevon at 6:08 AM on April 25, 2008

It depends on how you are invested. If you buy individual stocks as the bulk of your investing you shouldn't be asking this question, you should already know. If you are in a indexed mutual fund then you should probably just ride it out for the long term. Over long periods of time there is no more consistently safe vehicle to beat inflation than the stock market.

If you ARE investing in individual funds start educating yourself. That doesn't mean Askme either. Check out Motley Fool for some good advice.
posted by Bonzai at 6:32 AM on April 25, 2008 [1 favorite]

As most have said keep your money where its at - this too will pass.

If you we're going to do anything you might want to move it into a fund that's a less affected sector (tech, pharma) but as mentioned earlier index funds over time tend to be the best performing.

Heck even if you pulled your money out where would you put it?
posted by bitdamaged at 6:36 AM on April 25, 2008

About a year ago, alas.

If you're actively managing, you need to look at the real prospects of the companies you are invested. If they're being hurt by the recession, but otherwise solid, they will almost certainly recover, and you should ride them out. If they are fundamentally in trouble, you want to accept those losses and move on.

If you are in funds, watch the funds you are in relative to similar funds. If that fund is doing much worse, move it. If not, ride it out. It was popular in the boom to laugh at managed funds -- "paying management fees? You're nuts!" This is when you want a well managed fund. Anybody can make more in a bull, only the best make money, or at least tread water, in a big bear market. If your fund is only losing a couple of points, when everything else is losing 10%, *don't move that money!*

Right now, the one market segment you want to run away from is Financial. The banks are in trouble, that trouble is increasing. Food and Energy are going to do very well over the next three years. Transports are hurting, but they'll be one of the first to recover when the economy does. (Dow Theory says explicitly watch transports -- healthy economies sell stuff and move stuff around doing it.)

The other risk you need to be looking at is inflation. Making 8% a year sound okay, unless inflation is running 5%, in which case, you're only making 3% in real terms.
posted by eriko at 6:49 AM on April 25, 2008

The key is diversification. Stocks, Bonds, and cash. Rather than pull out you should be analyzing trends and moving your money so that is is well positioned for the next few years. International or Global funds, Fixed Income funds, and MoneyMarket funds. As well as Capital Opportunities and certain sectors (health and energy). Good luck, because you'll get as many opinions as people you talk to.
posted by Gungho at 7:04 AM on April 25, 2008

Dollar cost average. This is your best offensive mover in a down market. Do not let emotion or fear dictate your financial decisions.
posted by yoyoceramic at 7:19 AM on April 25, 2008

My husband is a financial analyst and a member of the Motley Fool community analyst team. I asked him this question and he chuckled and said "about 12 months ago."

Really, though, it depends on what you have. My Apple stock, for example, is doing great. However, if you have GM or Blockbuster stock, you probably want to sell it.
posted by Ostara at 7:21 AM on April 25, 2008

I continue to be amazed at the wisdom I find here on askmefi. raddevon, you are getting some excellent advice here.

I'd like to add one thing: I'm surprised no one has mentioned dollar cost averaging. I won't go into a long-winded explanation here, but in a nutshell you invest a fixed amount on a regular schedule, say every paycheck, or every month. If prices are falling, you're fixed amount is purchasing ever larger numbers of shares. When prices start to rise again, you're purchasing fewer shares, but all those cheap shares you bought on the way down are fattening your nest egg. It's a systematic way to buy low and (eventually) sell high, and it works well with index funds.

Keep up the good investment habits; you're asking the right questions.
posted by dinger at 7:24 AM on April 25, 2008

Eight years ago.
posted by thomas144 at 7:53 AM on April 25, 2008

I'd like to add one thing: I'm surprised no one has mentioned dollar cost averaging.

Be surprised no more!
posted by pardonyou? at 8:05 AM on April 25, 2008

Basic rule: the market goes up and the market goes down but over time it goes up more than it goes down.

The stock market is a forward indicator - it drops before the recession is official and it starts to recover at the first signs of hope. So, now that everyone says we are in a recession, I can guarantee that you missed the window for selling. (You don't want to buy high and sell low).

Assuming you have other savings, including rainy day money, and assuming that your retirement is more than 10 years away, then the stock market is actually a good place to be invested but you need to be diversified. For me, that's mix of S&P 500, small cap, real estate, international and international small countries - almost all index funds with low overhead. (Vanguard) I'm pretty good at just ignoring volitility but you might feel better with 20% in a conservative corporate bond fund. (Since it is in your IRA, you don't need a tax-free fund).
posted by metahawk at 8:05 AM on April 25, 2008

Oops. I did a search for "averaging", not "average".
posted by dinger at 8:12 AM on April 25, 2008

That's your retirement income. Unless you're retiring in the next 18-24 months, leave it alone, turn off CNBC. Also, sign up for your IRA provider's version of automatic rebalancing, which will keep your portfolio's allocation percentages constant over time (and many providers have products that will adjust your stock mix from more aggressive to more conservative automatically as you get closer to retirement age, as well).
posted by pdb at 8:14 AM on April 25, 2008

Thomas is right- the time to pull money out of the stock market is BEFORE a recession occurs. And the time to put it back in is the absolute bottom.

Please note:
1- A recession is a completely different thing than growth of stocks. They relate, but not directly. Every recession is different, and some stocks will do fine. Remember, stocks are only as good a what people think they are worth at the moment you are selling them.

2- We are not in a recession. A recession is a technical word meaning two quarters (six months) of negative GDP growth. Q4 2007 had growth. We don't know about Q1 2008 yet.

3- Dollar cost averaging is not magical. It is an effective tool for people who can't spend time researching the market and the companies they are investing in beyond the absolute minimum. It's great for the investment banks though because they can count on a good stream of people putting in their $100 a month into Microsoft. I'm not saying it's bad, just that it isn't the best.

4- When you are pulling your money out of the market, where are you putting it? If your stocks are losing 3% a year and the cash you moved into is losing 3.5%, it's a sucker's bet. Your assets should be wherever they are losing the least value.
posted by gjc at 8:20 AM on April 25, 2008

The stock market is a forward indicator - it drops before the recession is official and it starts to recover at the first signs of hope.

This is a good point, and a similar point is that in theory at any given time the market is supposed to have "adjusted" to the expected future (including a recessionary future). Obviously that's not terribly reliable (mostly because the future is not knowable), but the principle tells you that the people trading in stocks are already aware of the recession (or the state of the economy) and have factored that in to their valuations. The market is made up of stocks, and each stock is essentially the present value of the anticipated future dividend payments. So each stock, on each day, is essentially what the market believes the future value of that stock is worth. Put all stocks together and you have the stock market. In theory, if the market had fully adjusted/assimilated (or over-adjusted), you could have a deep recession and a steady, or even increasing, stock market.
posted by pardonyou? at 9:00 AM on April 25, 2008

I'm not so sure anymore there will be a rebound.

If this is about peak oil, then perhaps look at the sharemarkets in oil-exporting countries, whose domestic economies will be subsidised by having first dibs on the last of the cheap oil. Presumably in the short term they'll have an easier time expanding and turning a profit. (Though in the long term, they won't be adapting to the far higher levels of efficiency that everyone else is going to be forced to, so would find themselves uncompetitive when their magic subsidy declines).
But of course, IANAE.
posted by -harlequin- at 9:22 AM on April 25, 2008

Joseph Kennedy made a famous remark in reference to his selling most of his stocks in the market run-up before the crash of the Great Depression: When your shoe-shine boy starts giving you stock tips, it is time to sell. The reverse of this is the old maxim that you know it is time to buy when there is blood in the streets. There are strong elements of truth in these statements.

From your post and others like them, I'm getting the strong impression that now is the time to buy. Because I will be able to get stuff cheap from people (such as yourself) who are panic selling at below value.
posted by Justinian at 10:18 AM on April 25, 2008 [2 favorites]

Look at it this way: your stocks are down right now, but you haven't necessarily lost money. When you sell and get out of the market, you WILL lose money. There's a saying that, on a long enough scale, everyone's chance of survival is reduced to zero. Likewise, on a long enough scale, the stock market always rebounds.
posted by mattbucher at 10:28 AM on April 25, 2008

If you think the economy is going to get worse forever, why are you waiting? It's not like it's on an upswing now, is it? Sell stocks and buy gold.

If you plan on selling as the stock market is starting to decline and then buying back in when it's all over, having "waited out the storm" by speculating correctly, everyone's right: you're already too late. Plus, it probably wouldn't have worked anyhow. Thousands of people who know more than you or me work for investment banks, and it's their job to figure out exactly how to do things like this. If they can't do it, probably we can't either.

The third option is waiting out the storm by not doing anything. If you thought your investments were worth buying at their old price, and now they're cheaper, why are they worse long-term bets now? Unless you seriously think this recession will last longer than your investment horizon, you might as well wait for your investments to rebound. This too shall pass.
posted by goingonit at 10:32 AM on April 25, 2008

Buy low, sell high. A recession is a great time to put money into the market.

If you think the economy is collapsing permanently, sell your stocks and buy ammo.

We are not in a recession. A recession is a technical word meaning two quarters (six months) of negative GDP growth. Q4 2007 had growth. We don't know about Q1 2008 yet.

Right, so if Q1 had negative growth and Q2 does, too, we are currently in a recession. If Q1 had positive growth, but Q2 goes negative and it stays that way for Q3, we are currently in a recession.

So we may be in a recession, even if we weren't in Dec. 2007.
posted by mr_roboto at 12:00 PM on April 25, 2008

mr_roboto stole my answer. It depends. If you've still made some good gains (from the point of your initial investment to now) you might wish to sell them, to capture those gains before your investment declines further, especially if you have some capital losses to net them against. You might then reinvest into stocks that are cheaply valued at this time.
posted by demagogue at 12:36 PM on April 25, 2008

demagogue: If you've still made some good gains (from the point of your initial investment to now) you might wish to sell them, to capture those gains before your investment declines further, especially if you have some capital losses to net them against.

There are no capital gains and losses for tax purposes in a Roth IRA.
posted by JackFlash at 1:10 PM on April 25, 2008

There was an interesting article that I saw that showed why trying to time the market failed. Most of a stocks upward gains are usually ones that you can't predict, (look at Google's 20%+ this week) and that if you try to time your stock purchases you will most likely miss these one day movers and miss most of the gains.

The thing that makes dollar cost averaging is that it takes out the 'market timing' and replaces it with scheduled transactions that aren't affected by doubt and emotion. If you've decided that a company or fund is worth your money, then you break the transaction out into installments to make sure that you don't waste money loading in just before a decline.

If you don't have the time to research individual stocks then stick to mutual funds. I've built my own over the past two years by a new company each month to buy, and I follow Warren Buffett's advice not to buy anything that you wouldn't mind holding onto if the market shut down for 10 years. While some people might consider this a form of speculation, I always make a purchase with an idea of how long I'm going to hold it. And I most always precede the purchase with research and deliberation. Most of my investments I plan on holding for 3-5 years or more (if ever!)

Of course, as many have said, if you're young (I'm 28,) then don't worry as much about the short term. You've got more time to build back up if something goes wrong. I may have lost quite a bit of market value in the first few months of the year, but my regular contributions have got me back up to where I was, and in fact recent gains just this month have got me back to the break even point.

Don't keep your emergency fund in stocks, use them for long term goals. Keep cash in a savings or short-term CD.

My personal strategy in picking stocks (and forgive me if this is beyond the scope of this question) is to pick an industry or sector that you think will excel and buy all the major players. I have bought most of the major players in the video games market and and I am building up my investments in solar technology. Build a personal portfolio of companies related to your hobbies and ideals that can give you an emotional. If you do these things it wont matter if one of the companies underperforms cause the overall growth (if you pick well,) of the sector will make up for it.

And another recommendation for the Motley Fool.
posted by daHIFI at 1:42 PM on April 25, 2008

Buy low, sell high.
posted by neuron at 1:48 PM on April 25, 2008