After my most recent Net Worth update, where I showed some serious losses in the stock market last month, a reader shot me the following email…
As someone who calculates his net worth and asset changes on a monthly basis, I am wondering how you personally react to wild market changes such as what has happened in the recent month of May.
Going into May for the year 2012, I had approx. an 11.2% return on my 401K. I logged in today and saw that it hit negative returns for the first time. Should I hit the panic button and sell as much as possible, throw money into cash because I cannot find a decent return, or increase 401K contributions because the price is cheaper?
I know of at least one reader, possibly others, who would tell you to get out of the market. Not necessarily because of the recent declines, but because they believe the stock market in general is just a big Ponzi scheme.
While I guess one could try to make that argument, the fact of the matter is that for decades (centuries?) nothing has proven to be a better long-term investment than stocks. Nothing. That’s all the information I need to decide where I am going to put my money. The past is the best indicator of the future, and while there will definitely be days, weeks, months, and even years of negative returns, ultimately the trend has always been upwards.
I personally have no plans to get out of the market. Right now, last month’s losses are paper losses, not REALIZED losses. If you are expecting positive returns each month, then perhaps you should question why you are even investing in the first place? The worst thing I could do is buy in when times are good (at high prices) and sell everything when times are bad (low prices). Would you buy a house in 2006 that’s way overpriced and sell it for a 50% loss in 2012 if you didn’t have to? Probably not, unless of course you like overpaying for things and getting bad deals. Then by all means, sell everything!
I posed the question at the end of my net worth update “How do homeowners stomach making payments each month on a depreciating asset?” Stupid question really when you think about it. A house is a home first, an investment second. It makes sense that people will pay their mortgage even if the value drops because they obviously want to keep a roof over their head. Same goes for my retirement. I will still contribute to my retirement even during the “doom and gloom” because I want to be well taken care of in my days of gray hair and adult diapers.
Are you riding the market out or selling everything?
