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The Only Guide to Investing an Entrepreneur Will Ever Need by Lewis Schiff

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August 5, 2008

Is It Time to Panic?

Posted at 12:04 PM

I got a panicked email earlier this week from my very good friend, Maryjane, owner of a design agency in New York City:

"Lew, I had breakfast with a very savvy money pal the other night. She told me she decided to pull all of her money from mutual funds because she thinks it all may explode come September. YOU are in this market. I know you rode out other hysterical times and did O.K. when the rest of us got creamed.

"My broker told me it's volatile now. I am reading the papers and, geez, my stomach turns. The market is in the toilet, and I guess I thought I would have the stomach for it, but maybe I don't.

"I told my broker I would not touch anything for five years. I have a meeting with him next week to go over the portfolio.

What is your gut feeling about our bloody system? What should I do?"

Now, Maryjane is a bit emotional and she wears it on her sleeve. It's what I love about her. And I know her well enough to know that money is not her strong suit. I probably should have taken the time to call her, but I was traveling, so I responded by email:

"MJ, I really don't know how your money is invested so I have no way of knowing how YOUR money is doing. But in terms of the market in general, I am not changing any of my investing plans. I continue to hold diversified stocks in index funds and continue to buy a little more each and every month on the exact same day.

"Keep in mind, however, that I'm a long term investor with a 20-plus year time horizon, so I don't care if the market takes 10 years to work itself out. However, if I were a short term investor (five years or less), then I'd want to be more in cash. If I were not comfortable with risk, I'd also want to be more in cash these days because for the next couple of years, we could be in for a tough market."

How are the rest of you feeling? What would you have told Maryjane?

1 Comment

Posted by: Ralph at August 9, 2008 11:51 AM

My advice to Maryjane:

If you are a buyer of stocks, you want prices low so you can afford more of them.

If you are a seller of stocks, you want prices high so you get more for them.

So, if your money-savvy friend is the sort that buys and sells stocks all of the time, then she is right to avoid buying stocks she's going to sell in a year or two (or less) if the market is going down. Why buy a stock if you think you'll sell it at a loss?

But that probably isn't your situation. Ask yourself: on balance, are you planning on saving or spending over the next 5-10 years? Are you a buyer or a seller?

If you'll be a net spender (that is, selling some of your holdings because you're retired or need the money), then you should consider getting out of the stock market, or at least decreasing your exposure. If you stay in and the market goes down, you'll have less to live on; if it holds steady, it won't matter; and if it goes up, you will have missed out on a bit of extra gains, but only for a few years, which isn't so bad.

If you are planning on being a net saver for the next 5-10 years (that is, buying things like stocks and bonds), then this news of a market slowdown or crash should be music to your ears! The year-to-year fluctuations in the market aren't going to have much effect on the price of your holdings 10+ years from now (when you're selling), but a down market means you'll get more stocks for your dollar this year, beefing up your holdings.

So don't let the "savvy" folks worried about the market in the short-run scare you. The market is a great place for a long-term saver to be, and a down market is even better.

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