Money Magazine
Money Magazine's undercover financial planner

Toughing out market ups and downs

It may be painful to watch your 401(k) value plummet when the market takes a hit, but don't press the panic button.

Subscribe to Top Stories
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By The Mole, Money Magazine's undercover financial planner

mole_new.03.jpg
Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.

(Money Magazine) -- Question: I'm 23 years old and over the past couple of weeks I've seen a significant decline in my 401(k) value, so much so that a month ago I was up 12 percent on the year, and as of yesterday I am down 3 percent for the year. Should I be changing my current aggressive 85 percent stock allocation during these uncertain times or just stick with the current plan?

The Mole's Answer: Absolutely stick to the current plan. Seeing your portfolio drop by about 15 percent is painful, and you may be feeling the urge to bail out of stock funds and run toward safety. Perfectly natural as that feeling may be, it's also likely to hurt you in the long run if you act on it.

But let me digress a moment about human investing behavior. Behavioral finance studies have shown that a dollar lost hurts about twice as much as the pleasure you receive from a dollar gained. Thus, that loss you experienced is causing real pain and whenever we feel pain, we want it to stop.

In this state of mind, you may think that the best way to ease the pain is to sell the stocks and invest in government bonds and money markets. My advice is "don't do it!"

The behavior noted above is known as loss aversion. Its destructiveness lies in its ability to cause us to sell an investment after it has gone down. We have a tendency to feel very confident in up markets and then panic and sell at the wrong times.

We saw this in 2002, when there was more money draining out of stock mutual funds than any year in history. That was the year the U.S. stock market was down nearly 50 percent. At a time when investors could have been buying stocks at half price, they were doing just the opposite and selling in record numbers.

Telling you to stick to your plan and continue buying stocks does not mean I think stock prices are going up next month. In fact, I have no clue how stocks are going to perform next month, or even next year. There are, however, a few things I do know that are far more important.

First, I do know that since your portfolio is now down about 15 percent from last month that you have the opportunity to buy the same investments for 15 percent less than you paid last month. And any opportunity to buy low is a good thing.

Second, I know that the stock market works in the long run. In fact, the worst the stock market has ever done over any 30-year period is to beat inflation by 2.6 percent annually. "Safer" investments, such as bonds and U.S. Treasuries, on the other hand, have lagged inflation. Time is on your side. Since you're only 23 years old, you have an investment horizon greater than this 30-year period, and plenty of time to ride out the market's ebbs and flows.

Finally, I know that time in the market is far more important than timing the market. While I agree that we live in uncertain times, I'm not sure there is such a thing as certain times. Uncertainty is usually the reason most of us sell after the market has gone down. Moving in and out of the market is very likely to decrease your returns.

I don't know if the 85 percent stock allocation is right for you, but I do believe you should select an allocation that meets your willingness and need to take risk, and then stick to it.

In good times, don't get greedy and move into the market. In bad times, don't panic and get out of the market. Try to find the stock funds in your 401(k) that offer the lowest costs and broadest exposure to U.S. and international stock markets.

It's natural to feel some pain when the market goes down. So my advice is to think of it as a "no pain, no gain" opportunity to buy more of your equity funds at a lower price. Uncertain times are a certainty, and buying on sale is a very good thing.

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.  To top of page

The wrong place to find income for life

Protect your family without breaking the bank

Planners preying on military personnel

More from the Mole in Money Magazine:

Kicking the fund-trading habit: If you're not getting good results, and you're not even having fun, active investing is not for you.

Payday for financial planners: Plenty of clients with plenty of cash and a shortage of advisors. That means clients will have to be even more watchful.

Where planners (sort of) get it right: Diversification. Risk tolerance. Planners are sounding the right notes, but missing the big picture.

Photo Galleries
2015 Mustang's asphalt-peeling power goes modern The new Ford Mustang has been upgraded and updated to compete globally - but never fear, it's still a monster. More
15 top executives with $1 salaries Some CEOs and founders agree to salaries of just $1 a year. But once goodies like bonuses and stock options are added in, some of those executives end up taking home many millions of dollars a year. More
Mercedes SL65 AMG: 621 horses of topless power Turn heads as you blow by traffic in this roadster convertible from Mercedes. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.