Investments are where the heart is.

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?

20 thoughts on “Investments are where the heart is.

  1. Right now all of my investments are long term. My 401(k) is pretty well tied to the S&P so that’s been following that pretty close. My personal Ameritrade account are definitely long term. So, no real big plans to sell here.

  2. I have ridden out several market downturns in my life and I have never sold, and I don’t plan to. What you said is exactly true, and I am investing for the long term. I’m just hoping adult diapers are never in my future!! 😉

    • I’m just hoping adult diapers are never in my future!!

      They are not so bad. It’s the compression stockings that are the killer.

  3. Buy low, sell high. That’s the name of the game. I hope for opportunities like this to put additional funds into the market. Everything is on sale now.

    you can’t get emotional about market swings. If it goes up, it doesn’t matter unless you’re ready to cash out and realize those gains. Same with losses. We like bigger numbers in our accounts, but until we realize that cash, its just numbers on a screen.

  4. Investing isn’t for everyone and people make irrational decisions all the time. If you want to sell, then by all means do so. If you are that worried about your return levels then you are probably a risk averse person and should look at your asset allocation and adjust it to less risky positions. It may not grow as quickly, but it may let you sleep better at night.

  5. Right now riding out my 401k although right now it hurts too much to watch closely. I figure I’m still young (32) and have time. My IRAs are doing better (although not great) so there is still hope.

  6. Your retirement savings is a long term investment which means it has 35-40 years to grow. A diversified portfolio helps you get through some of the various cycles. If you think long term, you can look past the ups and downs that are inevitable.

  7. Not riding the market, not selling. Investing as much as I can!! Saw my broker last week and asked him to move EVERYTHING into a more aggressive position. (for background, I’m only 31, and we’ve got a conservatively-invested pension, so I’m not 100% out of my mind,)

  8. This is a very important point –>A house is a home first, an investment second. I feel that way about a lot fo things. Clothes, jewelry for my wife, tools… the value of something is just what you think it is. It’s what you are willing to pay for the value you see that it has. Right now, I’d pay 25 cents at most for a bottle of water, but when I’m re-shingling a house and forgot to bring water, I’d pay $20 for one sip of water. No one should buy a home unless the price they’re paying is worth the home to them. That way if the market goes up or down in the future, your mind shouldn’t be upset or altered because you spent what it was wroth to you.

  9. If the past is the best indicator of the future, I’m really scared. We recently had a housing bubble pop. If we look at other markets that experienced a similar event, the past doesn’t look great. The Nikkei225 plunged when Japan’s housing market bubble popped in the early 90’s, coupled with a reduction in exports (sound familiar?). Before that point, the Nikkei225 had a nearly identical growth pattern to DJIA.

    If you got into the Nikkei225 30 years ago, you would have seen fantastic growth for 10 years followed by 20 years of decay. You would be roughly where you started at this point.

    Lucky for me, I don’t believe past performance is any indication of future returns. I pushed more in last week while the market was having a sale.

  10. Had a friend that was thinking of stopping her contributions to her 401k because the markets were “tanking” and that money she is contributing could be better used to pay off her credit cards. I told her now is the best time to put money in because she is purchasing at a lower cost. Thankfully she did some math and realized that stopping contributions was a bad idea!

  11. May is usually a down month, so this wasn’t any big surprise. Traders should have lightened their positions in April. For long-term investors, it was a good month to add to your portfolio while everything was cheap.

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