Reader Question: I’ve Lost a Lot of Money in the Market. Should I Get Out?

I receive a number of emails each week from readers and I try to answer all of them the best I can, but occasionally I get questions from multiple people that ask the same thing. In those situations I like to address the question as a post which can hopefully help others who probably have the same question but just haven’t asked.

That’s what I’m going to do today. Many of the questions in recent months have been some form of:

I’m still relatively young and actively saving for retirement primarily in stocks, but the last few years have been rough. I’ve lost thousands of dollars and it hurts to see my money continuing to decline or remain flat. I’m concerned that the market may never recover and I’ve considered taking my money out of the market completely and investing it somewhere safe such as bonds, CDs, or gold. What do you think?

Understand Your True Time Horizon

So, should you get out of the market? That’s the million dollar question, but the answer is usually a resounding: no. For the majority of people writing in they are in their 30s. That means they probably have another thirty years before even thinking about relying on that money, and another few decades beyond that to make it last. That gives us about a 50-year time line to work with, which a lot of people forget about. Think about what can happen over this time span.

Just look back to see where we were about 50 years ago:

  • The interstate highways you drive on every day did not exist. Construction on the first highways did not begin until 1956.
  • Alaska and Hawaii were not even states until 1959.
  • The first domestic jet service didn’t start until late 1958.
  • Martin Luther King Jr. had a dream in 1963.
  • There was no such thing as the Internet or cell phones.
  • The introduction of color television was a technological marvel.
  • In 1960 the DJIA hit a high of 685. $10,000 invested at that price would be worth nearly $150,000, not including dividends, today.

Put things into perspective and look at how much the world has changed. In fact, just look back ten years when nobody knew what HDTV was, when you were probably surfing the web with a dial-up modem, and using a bulky cell phone with just a one color LED display. And when you go back 40 or 50 years it’s a shocking reminder how far we’ve come. So, ask yourself this: if your investments are something that you plan on using many decades from now, is it wise to make a drastic decision today based on just a few short years of bad performance?

Before you do anything, first take a realistic look at when you plan on using those invested funds. While nobody can predict the future, it’s safe to say that two bad years will likely be just a small blip on the radar over the next 40 or 50 years and making rash decisions without thinking about the future may do more harm than the poor investment performance itself.

Dollar Cost Averaging

Most investors save for retirement by taking a small amount of money and invest it regularly over time. Either through 401(k) contributions or periodic IRA deposits, chances are you’re regularly putting money into the market. This is a good thing because  provided you didn’t stop making contributions after the market started to fall it means you’re investing in stocks even when prices are low. And how do you make money? That’s right. Buying low and selling high.

If you’ve been continuing to make those regular, periodic investments over the last couple years while the market has declined, you have been getting more shares for your money as you buy low. Granted, the money you already had invested has also gone done and makes your performance look bad, but all of that money you’ve invested while prices are lower will see even larger gains as the market finally turns around, provided you don’t sell them off before they have a chance to do so.

So, before getting the urge to bail out of the market be sure to look at what you’ve been contributing while the market is down. It’s hard to see value right now, but the longer the market stays down and the more money you put into it at those levels, the greater the reward when the market does recover. Think of it this way. Don’t you wish you could have invested a bunch of money back in 1995 so you could sell in 2000? Or invest a bunch back in 2003 so you could sell in early 2008? We all do, but since timing the market is risky and nearly impossible to do successfully, the next best thing is to continually invest so you are at least investing some money when the market is down so it can take part in the next bull run.

The Myth About Safe Investments

Finally, to tackle the last part of the question I want to address the myth about safe investments. When people consider bailing out of the market they often talk about moving into something “safe” such as bonds, CDs, or gold. There’s no such thing as a truly safe investment. FDIC insurance aside, everything carries risk. It’s just a different kind of risk compared to market risk.

The biggest misconception people have is that if they get rid of stocks in favor for bonds they are now protecting their money and they can’t lose anything. It’s true that if you invest in safe bonds or bond funds such as government bonds, there’s little chance you’re going to lose money over the long run. What you give up for this relative safety is earning potential. Typically, the safer the investment, the lower the returns. So, you may sleep a little easier, but if the market decides to rally after you bailed out to government bonds now run the risk of losing out on those gains. And of course, there are many other bonds and bond funds that don’t have the full faith and credit of the U.S. government behind them and it is a very real possibility to lose money betting on bonds. Even if you aren’t losing your principal, you need to factor in taxes and inflation. In the end, bonds will often do little more than keep pace with inflation over the long run. The risk with that is you really didn’t allow your money to grow and now you could be faced with not having enough money to retire on.

Then you have investments like commodities. Gold in particular. TV commercials would lead you to believe gold is as good as it gets. It’s a real asset, it’s an inflation hedge, and since it’s at record high prices it’s the best time to be investing in this sure thing. Well, deciding whether you should be investing in gold or not is up to you, but it’s far riskier than you might think. While having some commodities like gold in your portfolio can be good for the sake of diversification, it is in no way a single safer alternative to the stock market. Putting everything you have in gold is about as smart as putting everything into a single company’s stock. Things go right and you’re significantly rewarded. Things go wrong and you’re left with a devastated nest egg.

Since it’s nearly impossible to time the market or know what the next hot investment will be, the best thing you can do is assess your diversification strategy. Having a proper mix of investments, especially those with low correlation, can go a long way in making sure you minimize your losses in bear markets while still taking advantage of bull markets. Jumping entirely in and out of stocks based on short-term performance is riskier than the market itself and you often end up just selling low and buying high.

Should You Get Out of Stocks or Not?

Finally, the answer to the original question after a long-winded response. Ultimately, there isn’t an answer that’s right for everyone, but for most people and in most situations, the idea of bailing out of the market completely, especially at this point, is probably a bad idea. Sure, we don’t know what is in store for the next few years, how the economy will fare, or what the future holds, but you should take into consideration all of the issues above before making that decision. Look at your true investment time frame, remember the benefits of dollar cost averaging even if you don’t see anything positive right now, and remember there’s no silver bullet out there.

When you look at the big picture you’ll probably come to the realization that it isn’t the best idea to bail out of the market. You may still make changes to your portfolio, adjust how much you’re investing right now, or even change your strategy a bit, but the all or nothing approach of being in or out of stocks isn’t typically the right way to think about it.

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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

25 comments
bobbim
bobbim

you address those who are young with many years left of investing ... what if I want to retire in 2-3 years and see the money depleting day by day?

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maayaxyz

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OTC.BB Stock
OTC.BB Stock

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terry
terry

I'm now 43 and have been buying and selling stocks for about 15 years now... I've done "okay", not at all bad, znd not great, and I 've never sold for a loss, ever, HOWEVER, sometimes when I was scared I just took a nickel or a dime profit and got the *&^% outta dodge and said "phheeeww"...
With that being said I have come to my own conclusion to sell everything while the going is good. I've sold all of it, ALL for a profit, and am waiting and hoping for my last three stocks to come back up for a very slight profit of under a dollar each.
I don't like the way things are looking long term in our country financially, and I have now realized that in my opinion, the market TRULY is rigged, and I have just decided get out while you can, and something is better than nothing. Call me whatever you want, but I want out now.

Chris
Chris

I am amazed at how people just assume that we will rebound and have a chance at an economic recovery, Has anyone been focussing on our depleating resources and over abundance of people on this planet? You really have to consider Chris Martenson's three E's and how they play against each other - Economy - Energy - Environment. This is not 1972 or 1958.... There are 6.5 Billion of us little bugs and resources are getting mighty thin... Talk of the stock market seems silly to me now. I am cashing out! I mean out all the way... I am taking a hit, but it's better than not having the money at all. Get ou now while you still have something to get out.

Thomas
Thomas

People need to learn how to value stocks instead of just blindly charging around towards the current bubble. (eg gold)

Then again, if there was perfect information, I wouldn't be able to find undervalued stocks to buy.. or other people (eg goldbugs/Glen Beck) can't lead people, like sheep, into buying into a bubble then selling out and leaving the sheep holding the bag.

Geoff
Geoff

The stock market is a mess right now, and I see that the P/E ratio is much higher than it what might be considered a down market.

The alternative to leaving the market is to stop entering into it. Pay off your credit cards, put money against your mortgage, build your savings. In the first 2 scenarios you have a guaranteed positive return on your investment. The third gives you piece of mind. I see that the days of borrowing to invest in the market are over.

Here's food to chew on:

"In the week ended September 1, domestic equity mutual funds saw $7.5 billion in outflows: the biggest one week outflow in 2010 since the $13.4 billion redeemed in the Flash Crash week. The trend developing is simple: retail investors withdraw increasingly greater numbers in weeks in which the market is down even a little, and withdraw just a little in weeks in which the low-volume melt up presents them with an opportunity to get out at a better price level. Of course, the common thread is that as we have said for 18 consecutive weeks, retail just wants out. And now that, courtesy of Mary Schapiro, retail has finally put two and two together, and knows that even the regulators are concerned about redemptions, which are perceived by the SEC as being a function of distrust in market structure, we now fully expect more and more redemptions."

http://www.zerohedge.com/article/retail-capitulation-stock-outflows-surge-just-under-10-billion-18th-consecutive-week-record-

Financial Samurai
Financial Samurai

I feel bad about how so many have been tricked into the trance of stock market investing. Contribute $16,500 a year in your 401K, invest it all in the markets, and don't expect anything in return.

Jesse James
Jesse James

Good idea for putting things in perspective.

starshard0
starshard0

Nice idea putting things in perspective. I've been trying to cut my expenses as much as I can to invest as much as I can as the market recovers. It's crazy that people want to bail out now, when I think all signs point to some huge gains in the not-too-distant future.

As far as gold, the best time be buying is when the commercials "aren't" running, because that's when everyone's buying gold at low prices inteast of trying to sell it to you at record highs. Why anyone would be interested in buying something at a record high is beyond me. Would you be rushing out to buy gas if it was $10 a gallon?

DIY Investor
DIY Investor

In November 1972 I was 25 years old. The S&P 500 closed at 115.49 on my birthday. Today it is at 1022.58. In 1972 there were no cell phones, offices weren't equipped with PCs, families drove station wagons. In 1972 our immediate threat was the Soviet Union. The threat of a nuclear war occupied the country. Viet Nam was raging and young people were viewed as out of control. In 1974 OPEC quadrupled the price of oil overnight and there were gas lines everywhere as gas was rationed. In 1987 the stock market crashed - the market dropped 24% in one day! I saw people quit the investment business that day. They just walked down the hall and turned in their resignations.
Moving into 2000 people predicted widespread computer crashes - planes weren't supposed to be able to fly and mass transport was expected to break down. Corporate governance was at an all time low as companies manipulated their earnings. In 2001 we had the terrorist attacks. This resulted in two wars for the U.S. Some people predicted that people would never fly again.
Today everyone has cell phones, workers have PCs on their desks, incredible breakthroughs are being made in bio tech, houses are being revamped to be environmentally friendly. The car you drive 5 years from now will be vastly different from the car you are now driving.
Today is different. We live in an information age. Kids now have the capability to solve the energy crisis literally in their garage.
Do you think 35 years from now people will look back and say 2010 was not a good time to invest?
I won't be around so I'll frame it in terms of 25 year olds. You guys have no idea about what type of products are forthcoming and the companies that will be formed and the advances that will be made. This puts an investor at a disadvantage because he can always see the problems explicitly in front of him but what can't be seen are the industries and products that will be formed.
One thing is for sure though - there will always be an excuse to not invest. If I was 25 years old I would be in the market big time.

ringo
ringo

wassup - nice to see a realist perception in todays world, as we have had many dips in the market I dont think we ever had the problems of today. In todays world we are in my opinion at the brink of going downhill..nothing can grow forever, our economies are maxed out, people and governments are maxed out with debt, massive debt at that. It will be interesting to see what happens, but I see way too many problems that are not even out in the open yet.

Zachary
Zachary

Nope, buy more shares while the market is down! You'll be glad you did when the market goes back up.

wassup
wassup

The decision to invest in the market is getting much more difficult. In my 25 years of investing, I have never seen a less desirable market environment. Stocks may rise and offer a decent return, but there are so many new structural problems with our financial markets today, that it will require a massive re-regulation and complete overhaul before any "gains" can be counted on as lasting I expect many successful companies to slowing wean themselves off the Public markets in the next 10 years. By 2030, you may find there simply aren't ANY companies left to invest in no matter what.

Here are few items to consider before putting your hard earned savings into the Stock Market:

1. The Dow is lower today than it was 10 years ago! If you factor in dividends paid you would be lucky to have beaten the return on a Canada Saving's Bond, and in fact you probably lost money. Think that this was a extreme 10 years.. Hardly, the Dow was below its 1929 high as late as the mid 1950s... a 30 year losing run.

2. Good Companies Go Bad... All the Time. Think of all the "great" companies who destroyed their investor's life savings over the past 100 years... Heck, over the past 10 years I can name many, starting with Nortel, Enron, & Worldcom. You don't even need to include those pigs, what kind of return have you gotten from Cisco in the past 10 years... What about Intel? I'll tell you, nothing, nada, zip.

3. Flash Crash 2010. This is just the beginning as the Machine take over. The market today resembles some sort of sick Si-Fi Movie more than a place to invest your hard earned money. "High Frequency Trading" computers used to control 10 - 20% of the daily volume, in 2010 its 80% and rising...

Think you have a chance against the machines? Think again. Add "Exchange Traded Funds" of mass destruction as "Mad" Jim Cramer calls them. These monsters have turned stocks into commodities in 2010 and no matter what company you buy.. the Fundamentals don't matter anymore. You are at the mercy of the ETFs... and they will destroy your RRSP stock/mutual fund investments in the next 5 to 10 years.

Aury (Thunderdrake)
Aury (Thunderdrake)

One thing I've noticed is that we're in a minor inflation of paper assets as a whole. We're reaching a point where commodity assets will be having a comeback I noticed, due to obnoxiously inflated fiat money and the over-investment in paper assets.

If someone is already in stocks however, I would advise those people to long any blue chips they may own, and develop short positions on whatever's possible. Let it be said that more can be made during a down market.

The traditional short is all too risky for me. Personally, I'd go for synthetic shorts (Quite low risk if one is covered) if one is afraid of losing the value of their stock.

credit girl
credit girl

I'd agree with you on that one Impulse Magazine. A few of my friends came into the stock market thinking they'd get in and get out and make lots of $ but that's not how it works. You've gotta set your goals.

Impulse Magazine
Impulse Magazine

My advice is to decide if you want to invest for the long or short term

DIY Investor
DIY Investor

Really good answer. I totally agree - for most people, especially young people, they should stay the course. In fact, people will likely look back 10 years from now and see this as a wonderful investing opportunity. The fact that stocks have dropped means that they are on sale. If possible, I would suggest upping exposure to stocks.
Bonds on the other hand are very expensive as is gold. I would stay away from these sectors.
In terms of the overall market it doesn't make sense to look at and get excited over short-term results - either positive or negative.
When I was younger I bought a number of shares of bank stock at $7/share after it had dropped from $21/share. It then dropped to $3/share and I had that sickening feeling in my stomach. Three years later I sold it at $24/share. At that point the sickening feeling had vanished. Patience is a virtue in investing but you don't have to take it from me - Google "Warren Buffett".

Credit Girl
Credit Girl

Thanks for the 50 year perspective. A lot CAN happen in 50 years but sometimes as young adults, a couple thousand dollars lost is really a significant amount to us so we may panic and decide to withdraw our money at a lost. I now see why that may not be such a smart idea.

Geoff
Geoff

Wow, I wish I had 16K a year to invest in my retirement fund! :)

Geoff
Geoff

A good time to buy gold is when the commercials aren't running? Here in Canada the most number of gold commercials here are the ones where companies want to BUY your gold, not SELL it to you. This is positive for gold.

"It’s crazy that people want to bail out now, when I think all signs point to some huge gains in the not-too-distant future."

I am very interested, which signs are those?

Rob
Rob

Yea companies want to buy your gold for below its value and quickly resell it to everyone and their mother who's buying it now. The US government is already taking steps to cut down corruption with these "cash for gold" schemes. A good rule of thumb, do the opposite of what "everyone" is doing, especially cnbc.

Geoff
Geoff

"A good rule of thumb, do the opposite of what “everyone” is doing, especially cnbc."

Agreed. I know of no one personally who has bought or sold gold. Contrast that to the dot com bubble where, at its height, strippers and cab drivers would give you stock tips. I don't think we're there yet, not by a long shot.

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