Why It Might Be a Horrible Mistake to Sell Out During a Down Market

f you are more than five years away from retirement, your 401(k) was invested in a broadly diversified, low-cost index fund, and you’ve sold off your assets as the market has collapsed, you have made a very, very stupid long-term decision. Believe me, I wish it could be sugar coated, but you’ve effectively just dumped your ownership of great American businesses such as Johnson & Johnson, Coca-Cola, Wal-Mart Stores, and General Electric to value investors at a fraction of their intrinsic value. After years of diligently building your wealth, you’ve turned them over to hedge fund managers, well-heeled executives, and disciplined personal investors that have the emotional strength to ignore volatility and instead do what makes sense five or ten years from now.

The worst part: You sold because other people were selling their stocks (many of them involuntarily due to margin calls). It’s the grown up version of the classic question posed by nearly every mother in history – if your friends jumped off a bridge, would you? Do you really think that Pepsi is going to sell less soft drinks and potato chips over the next twenty years because of a recession? Sure, as Warren Buffett has said, short-term profits are going to get hit at nearly all companies throughout the economy. The long-term health of the United States should continue to trend upward given our social, economic, and legal structures. Just as stocks have been the greatest source of wealth since the market meltdown in 1973 and 1974, they should continue to be the best vehicle for long-term over the next thirty years.

Instead, for those of you who have time to wait out the volatility, it might be a good idea to consider drastically increasing your retirement contributions while the market is falling. Of course, this is only a possibility if you’ve been following all the rules that are constantly espoused by financial advisors such as Suze Orman by establishing an emergency fund, staying out of credit card debt, owning your home, and living well within your means. Otherwise, you simply won’t be able to afford to take advantage of the current prices. (This, it should be noted, is one of the reasons by the rich get richer – when things go south, they can pick up assets on the cheap.)