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Coping with the Wall Street meltdown -- is it time to sell all stocks?

Coping with the Wall Street meltdown -- is it time to sell all stocks?

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This article was first posted November 1, 2008.

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Last week, Retire Early got an e-mail from a reader who wrote that his financial advisor was telling clients "to immediately sell all stocks and equity mutual funds." That would have been prescient advice last October when the market was at an all-time high. But it's likely to be dumb advice in October 2008. Indeed, fabled investor Warren Buffett recently revealed that he'd "moved his personal portfolio into stocks -- 100 percent", while Vanguard founder Jack Bogle advises investors to "stay the course" and sees a 9% annualized return over the next ten years from these depressed levels.

If you retired last year when the Dow Jones hit its all-time high of 14,280 on October 11, 2007, the equity portion of your portfolio has declined by about 40%. As the table below illustrates, a retiree with a 60% stock/40% fixed income portfolio would have seen the overall value of his nestegg decline by a bit more than 25% over the past 12 months. However it's not all bad news. Your portfolio is still generating over $30,000/yr. in dividend income (about 75% of the annual withdrawal if you're using the 4% rule.) And even if your dividend income was cut to zero, you still have about ten years' worth of living expenses in fixed income securities. It should be at least a decade before you'll be forced to sell stock to meet your needs.

$1 Million Retiree Portfolio Using Low-cost Vanguard Index Funds
Fund Name Value ($)
Value ($)
Yield (%)
20% VFSUX Short-Term Bond Admiral Shares $200,000 $196,223 5.12% $10,047
20% VAIPX Inflation-Protected Securities Fund-Admiral Shares $200,000 $200,447 6.01% $12,347
30% VTI Total Stock Market ETF $300,000 $182,037 2.77% $5,042
5% VBR Small-Cap Value ETF $50,000 $30,642 2.64% $809
15% VEU FTSE All-World ex-US ETF $150,000 $74,926 1.22% $914
5% VWO Emerging Markets ETF $50,000 $20,554 2.87% $590
5% VNQ Real Estate REIT ETF $50,000 $26,768 5.08% $1,360
------- . ------- ------- ------- -------
100% = Total Portfolio Total = $1,000,000 $736,596 4.22% $31,109

How about rebalancing?

Rebalancing at this point would mean moving about $100,000 from fixed income to stocks -- the exact opposite of what our friend's panicked financial advisor is telling his clients. If you are tempted to join the panic and sell your stock, forgoing rebalancing for the time being might be a useful compromise. The odds are that stocks will be higher when you're more comfortable about the market, but at least you won't have compounded the mistake by selling everything now.

What to conclude from this analysis?

Timing the stock market is difficult to do. There's been a long list of financial seers who've done it once (e.g. Elaine Garzarelli, Abby Joesph Cohen) but few do it a second time. Harry Dent may have come closest with his 1993 prediction of The Great Boom followed by a Depression starting in 2008, though he missed the 50% decline in the market from 2000-2002. That's why most successful investors follow some kind of long-term buy & hold strategy that avoids wild swings in asset allocation.

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Copyright 2008 John P. Greaney, All rights reserved.

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