Keep Investing During Market Declines, Part 2

In Keep Investing During Market Declines, there were a few commenters who disagreed with my sentiment that investors should keep investing no matter what the market was doing. Instead, they were advocating pulling out of the market, waiting out the downturn, then jumping back in for the ride up. The problem with this? No one knows when the downturn will end or the upturn will begin.

I'm not sure the commenters were buying this from me, so I thought I'd post MSNBC's thoughts on the issue:

Gordon Ceresino, vice chairman of Federated Investors' MDT Advisers, contends that employing an investment strategy that extends over at least seven years can help investors look past the day-to-day swells and swoons of the stock market and help them resist the temptation to sell their holdings when Wall Street gets rocky.

"They get too caught in the emotion and they will tend to zig when they should have zagged," said Ceresino, referring to professionals and everyday investors alike.

Investors who just can't get past their nervousness about the market can still move into areas of safety like government-backed bonds. Market-watchers urge investors to be mindful, however, of the hazards of reacting too quickly — someone who pulls too much money out of stocks may miss out on the start of a Wall Street rally. Indeed, investors are still debating whether the economy is already in a recession or only a mild slowdown.

Ceresino said that trying to pick when to exit and re-enter the market is a daunting challenge for any investor, even a professional.

"The person that thinks they can lock in their current portfolio returns by going to cash and then time themselves back in — what you end up doing is you end up destroying your ability to meet your long-term goal."

No one can predict when the market will go up or down. And since the stock market's trend in the long-term is up, in the long-term you have much more to lose by being out of the market than you could potentially "save" by being out of it in a downturn.

Me? I'm still investing as much as ever (and even a bit more.) I've recently moved some of the cash we were saving as a downpayment on our new home into the market (I like buying at a discount.) Don't worry, we still have a large downpayment in case we do buy a house, but I felt it was time to put some money into a much cheaper market. I think I'll be rewarded several years down the road.

Comments

[Lawrence]

I completely agree with you.Also, I am doing the same thing in regards to investing more than usual. If I like the fundementals of a company when I bought it at $50 when it is trading at $32 I am going to load up. There are lots of company out there that are trading at a deep discount compared to P/E and book value.Most of the professional investors are not going to cash because that is more of a risk then the stock market. For individual investors it can be costly in terms of Comm.,Redemption Fees and taxes plus the commissions when you re-purchase.

[Becky]

I also agree. I went to a seminar once where the speaker used a really neat illustration to demonstrate this. He used a clock (you know, the kind with hands on it) and said that 12 o'clock was the market high and 6 o'clock was the market low. He then moved the hands around and showed that most people realize the market's in a decline, get scared, and sell at about 4 or 5 o'clock. So, they're selling almost at the low point. He then moved the hands around and said most people stop being scared about the market at about 10 or 11 o'clock and that's when they buy. They are buying at almost the high point!
It was a really neat illustration of how much money you lose by selling when you're scared and buying when the market looks not-so-scary. You should be doing it the other way around! When the market makes you scared, that should be the trigger to let you know that it's a good time to buy :)

[cnett]

I agree. I'm investing more than usual because of the deep discounts. 2008 will be an exceptionally profitable year.