Mutual funds - Don't sell low? How far down do you ride this train wreck before jumping off?

Question

We've lost an awful lot of money staying in the stock market (Vanguard & other mutual funds) while it's gone lower, and lower, and lower. Some people I know have lost their entire life savings (not diversified enough - poor planning, I know).

My wife wants to pull all her money out of mutual funds and put it into a fixed interest account, like a money market. I have been telling her that's not wise, since she bought the shares at a much higher price than they're selling for now. And I've continued telling her that as she's continued to lose tens of thousands of dollars.

I've convinced her to stay in mutual funds at least until we have a new President (regardless of who he is, things will change, I'm sure). But then she's ready to bail if things don't turn around.

What do I tell her when she says she doesn't want to lose the money she has left, but also doesn't want to sell at a huge loss? How much loss do you take before you say, "enough is enough"?

Answer 1

The investment process is simple.  It only gets complicated when people who make a living based upon your investment activities tell you what to do.

Try this:

1) The ONLY reason to invest is 'to make money'.

2) If you remain invested for another day/week/month/year do you expect 'to make money' or 'to lose money'?

3a) If you do not expect 'to make money' and you remain invested, you violated the rule of step 1.  You need to re-evaluate why you are investing. The other choice is 'to lose money'.

3b) If you remain invested and you expect 'to make money', you followed the rule of step 1.  In this case, you will have no worries because you expect a positive outcome.

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The critical part of this process is step 2.  Are your expectations of market behavior in step with reality?  If so, act upon your expectations.

If your expectations of market behavior are totally random when compared to actual market behavior, then you are unable to do this.  Buy a conservative fund, put your money in and never, ever check how it is doing.

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More specifically addressing a 'Train Wreck'

Were you invested in tech stocks in early 2000?  Was it 'good' to leave the money there through 2002 and lose 75%?  (NASDAQ composite performance)  If not, what was the 'right' or 'correct' or 'desirable' amount to lose before you bailed?  Or, using your words:

How far down should you have ridden that train wreck before jumping off?

I followed the process above.  When my expectation was that the market would continue to decline, I pulled my money out.

Answer 2

The question to ask yourself is what are you investing for and what is your investment time frame?  Mutual funds will mirror whatever securities they are invested in and will therefore have "down" periods.  A new president will not have an immediate effect - the economy doesn't turn on a dime and politicians have much less influence on it than they want to admit.

Answer 3

It's impossible to predict how the share market will go, or how individual companies will go. I would look at the ones you have shares in, look at their history, their current financial position, and their overall strength compared to the market. If they are strong and viable, there is a fair chance that their price will rise again, but maybe not for quite a while, and maybe not as high as you would like.

If their financial position is weak, then you may need to cut your losses and bail out.

You should also take into account the returns you are getting in the form of dividends or interest.

Answer 4

You should have moved into fixed income investments sooner if you were going to need the money in a few years.  The rule of thumb is to have the same percentage in fixed income as your age.  The only choice you have now, assuming you're well diversified, is to keep buying while prices are low, dollar cost average, and wait for a recovery.  Or sell at the low prices.

Answer 5

I'll probably regret this since you are so sanctimonious but here's the simple truth.  BUY MORE.  As the stocks go down you cost average them.  One of the reasons stocks are tanking is people like the ones giving you advice here and your wife are selling while people you despise (and I enjoy that fyi) are buying.  Once it's all said and done I'll make more money than I started with (you know a profit) and you'll be sol from settling for much less.

Here's the quick lesson:

Pre-downturn

100 shares at 1.00 for 100 dollar total value

Stock drops to .50 a share for a 50.00 total value (net loss 50.00)

Purchase 100 shares at .50 portfolio costs 50 dollars bringing your portfolio to 200 shares at a cost of 150 dollars for a 75 cent per share value.

When the stocks recover (and if you bought right they generally do) your 200 shares go to 1 dollar per share for a 50 dollar profit.  

It's basic economics and if you bothered to have a real financial adviser (not the moron the bank puts in the chair to make some extra cash) you would know that and not be all that worried.

Answer 6

tough question ....

and I  have no terribly good answer, just an idea that

popped into mind:

sell half of the stocks and put proceeds into fixed income in

a separate account

track the two accounts and see which one

has done better in  a year.

and in 2 years ...

3...

4...

etc

it's the only way you will know which was optimal, tho of

course it will be after the fact

This might not "cut your losses" but it will balance the two

strategies.

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Answer 7

First of all, its yahoo answers not yahoo advice.  

So here is the answer to your problem:

Sell that mutual fund that keeps going down and put it in a proven mutual fund like CGM Focus Fund or hot sectors like fidelity select chemicals, fidelity select natural resources or hot countries like fidelity Canada fund or fidelity latin america. Look for those 4-5 star morningstar rating funds.

Speaking of train wrecks...how about those shining train, like CSX , BNI, UNP. These rail transports' business is going to boom as the oil prices go higher.

If you are not optimistic about the market, i guess you can put it in a CD or money market.  (I guess this was all advice after all)