Dumb Money Move No. 2: Sell your stocks and stay on the sidelines until the market bottoms

Posted Aug 6th 2008 1:35PM by Daniel Solin
Filed under: Personal Finance

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

You can't blame investors for being nervous. The markets go up one day and plunge the next. This stomach-churning turbulence creates anxiety and sometimes panic.

The financial media inflames the situation with breathless news of breaking developments and endless, often contradictory, predictions.

It is no wonder that investors are tempted to sell their stocks and sit on the sidelines until the market "bottoms out."

This is generally a bad idea.

You should be concerned about short-term market volatility only if you need to sell in a down market. If that is the case, you should not have been exposed to market risk in the first place. Investors who anticipate needing a significant portion of their assets within a five year time horizon do not belong in the markets, even in a very conservative portfolio consisting primarily of bonds.

Investors who have a time horizon ranging from five to twelve years should determine their asset allocation and invest in a globally diversified portfolio of low-cost index funds. These investors should not be spooked by short-term market volatility. We have eighty years of stock market history that tells us that investors who stay the course will be rewarded for their discipline and patience.

Trying to time the markets by dumping stocks and waiting for market stability is risky business. A study by Charles Schwab & Co concluded that "... the risk of waiting [for the right time to invest] appears to be much greater than the potential rewards."

If you have the right asset allocation, ignore the pundits. Don't sell your stocks.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).

Tags: sell out, stocks