Right now your 401k is down 20 to 50 percent and you are stunned! You’re asking yourself, what should I do? Stock market logic says not to sell right now, that markets go up over time and if you have a horizon beyond 10 years then you’ll be fine.
Well, that used to be true. The last year has wiped out anyone who has held to the “buy and hold” mantra the last 10 years. But isn’t this the time to buy, when stocks are “cheap”? Shouldn’t I dollar cost average to lower my cost basis? NO! At least not until we are out of this mess and we have an all-clear! The current credit crisis has everyone scrambling for the sidelines and everyone is not there yet. Baby Boomers, Banks, Hedge Funds, 401ks, IRA’s are all going to sell their stocks on rallies. Financial institutions have to de-leverage balance sheets. People close to retirement want out so they can have enough cash to survive. Hedge funds and mutual funds are facing massive redemptions from retail investors. All this means is that everyone is looking to sell at the first sign of a rise in the stock market.
Baby Boomers have controlled the booms and busts of our economy for the last 50 years. The housing market boom started in the 80’s when the first baby boomers bought their first homes. The second housing boom began in the 90’s when the second wave of baby boomers bought homes and the first wave moved into their second home. At the same time, 401ks and IRA’s became popular as Boomers started planning for retirement. The current housing bubble is then a result of a gap in demand. The current generation is not able to buy the houses that the baby boomers are selling off. This depreciation started in 2005 and is expected to last another 2 to 3 years. This is also the case with the stock market. Baby Boomers are looking to retire and want to get their money out of harm’s way. This means they will be selling and withdrawing their retirement accounts on any stock rally.
So what should you do? Do the same thing. If you see any rallies, from March 2009 – May 2009 in particular, you should get back some of the devastating losses you took over the past year. At this point, we suggest moving your money to a cash fund and wait. Place your 401k or IRA deposit into a cash fund. This also goes for investors who just started their retirement account as well. We should expect to see a market bottom between 2010 and 2012 depending on how our country manages the crisis. If we see any changes we will update you via our blog, so keep reading.