Jumping Out of Stocks Could Sting More Than Staying

By Martha M. Hamilton
Sunday, March 23, 2008

Are you an investor convinced that stock prices can go no place but down?

And did you once believe housing prices could go no place but up?

Predictably, many investors who believed in the housing myth are now wedded to a market myth -- that the bear market is forever. They're rushing to pull their money out of stocks, thereby locking in losses they have experienced only on paper.

Please, people. Take a deep breath.

It's not that there are no dangers in the economy. There are risks facing financial institutions, growing concerns about inflation, the strong possibility that we are in or heading toward a recession, and a falling market. But fleeing the market now may not be the best course.

Downturns are not forever, and paper losses are like paper cuts: They hurt like crazy but do no lasting damage. If you stay in the market, you will be there for the turnaround, which always comes. If you get out, getting back in may prove costly because by the time you notice the shift in direction, chances are it will have been going on for a while. That means prices will be higher.

According to Richard Marston, a finance professor at the University of Pennsylvania's Wharton School, stocks usually start to rise before a recession ends, and the rebounds can be impressive. After the recessions of 1982, 1991 and 2001, Marston said, the Standard & Poor's 500-stock index rebounded within a year from the bottom of the bear market by 59 percent, 34 percent and 39 percent, respectively.

Not everyone has the luxury of staying put. Investors who need cash now have little choice but to take the loss. But almost every financial adviser I have talked to in recent weeks said that those who keep their money in the market should sit tight.

Instead, many investors are taking their diminished stack of money out of individual stocks or mutual funds and putting it into investments they view as safer, such as money market funds, certificates of deposit or bonds. The problem with many of these investments is that the returns are so low that they may not keep up with inflation.

For instance, money market rates have dropped as the Federal Reserve has lowered interest rates, so that the highest-paying accounts have annual yields of less than 4 percent. At the formerly high-paying online bank where I keep a small stash to cover emergencies, the annual yield has dropped from close to 5 percent to 3 percent.

Any investor should always have at least some money in fixed-income investments, said Kelly Campbell of Campbell Wealth Management in Fairfax, but right now, with rates low, money market accounts and long-term CDs should probably be avoided.

Campbell said he is advising clients not to flee the stock market. "If you're going to get out of the market now, you've got to be right twice," he said. "You've got to be right when you get out of the market, and you've got to be right when you get back in."

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