Reader Rich is considering moving back in the market by allocating a small portion of his 401k. Here’s what he said:
Last March I sold all mutual funds in my retirement accounts at work and moved them into money market funds, currently allocating 100% of new monies into those money market funds.
My question is: In your opinion, should I begin allocating a percentage of new money back into the market in my 401K & 403B? I am satisfied to stay in cash but would hate to miss a 30%-40% increase even if I only have small monthly allocations of say, 2-10% going back in to the market.
I have heard several opinions lately advising people to get back in. One guy on CNBC said the only thing worse than experiencing a 40% decrease when the market declines, is missing a 40% increase when the market turns around. Well, I missed the decrease when I moved into cash.
Yes, there are many opinions floating around, especially on CNBC, as to what the best course of action might be. I have four reasons for you as to why you should stay put:
First, you are far better off than most investors by having avoided the sharp market drop. Congratulations!
Second, you have put yourself in the enviable position of not having to make up losses. So there is no reason for you to have to make panic decisions in trying to be afraid of missing a 40% rebound. Besides, chances are pretty low of the market first dropping 40% and then rallying 40%. That’s wishful thinking given the current economic circumstances.
Third, your plan is to allocate 2-10%. While that is a small amount to risk, it also will not make much of a difference on your overall portfolio performance even if the market decides that a Santa Claus rally of another 10% or so is warranted.
Fourth, as I have repeated mentioned, in my opinion it is questionable whether the real market bottom has been set in November. I think there is more downside risk, and you’re better off waiting for an actual trend reversal before committing your serious money.
However, if you consider a small portion of your portfolio “play money,” then by all means go ahead and take a chance. Just be sure that you never confuse your pile of serious money with your pile of play money, so that your investment priorities will always be in order.
Comments 5
Thanks Ulli, I'll stay in cash with my 401K & 403B.
Rich
This was a sucker’s rally. Ulli is right again.
Ulli,
Great article. I’m chomping at the bits and thinking I’m missing out on the upturn. Good to have some play money possibly in the mix.
Looks like today’s results confirms it’s too early to be back in and the price/volume action has been weak. I read Investor’s Business Daily and their trend charts and Daily Big Picture confirm the same.
Your video link last week to Louise Yamada was eye opening.
Ulli,
The fact that this was posted AHEAD of today’s meltdown speaks volumes. Great advise as always. Thanks for all your help and insight !!!
Cole
Ulli thanks for the good advice. We are in a once in a life time correction as it seems alot worse than the 2000-2002 bear. I am always amaised at people buying and holding when their savings have been chopped in half. I pray that this correction will soon end but will probably continue for some time. You have turned into an asset as you can smell a fake rally when others feel it is the real thing.