Expert: Paul Henneman - 1/28/2009

Question
I understand the idea of buy low and sell high in a theoretical sense.   But my recent experience causes me to question it.  If you believe that things are likely to get worse before they get better, wouldn't it make sense to take your money out of the stock market/mutual funds and invest it in CDs, a savings account, or put it under your mattress before it loses any more value.  Then when the economy gets a little better, then reinvest some of it in stocks.  If you lose all your money in the stock market, it doesn't matter how much the stock market eventually goes back up.  And if you believe it's going to be a long slow climb, then certainly you can recognize the signs of things improving.  Would you help me to understand why I should keep my money in the market when it keeps going down down down.

Answer
Betty,
  Yes, you are absolutely right that the goal is to ALWAYS buy low and sell high.
  However, the problem is that it is virtually impossible to tell for certain if the market will go up or down. Professionals spend their lives studying this, and are often wrong.  If everyone knew what the market will do, then buying low and selling high would be easy.
  However, due to this uncertainty of the markets, there are other strategies out there such as investing every month, or staying fully invested over time and not trying to trade more frequently. The argument would be that the market goes up in the long term, even terrible times like the past year will eventually work themselves out.
  You appear to be very confident that the markets will continue to fall. If you are fairly sure, then yes, it would make perfect sense to sell. However, when recoveries come, they tend to happen quickly. It is easy not be in the market after bad times when this happens, and miss out on a significant portion of the recovery.
  To make things even more complicated, during such times as these the markets are very volatile, moving up and down a great amount in a short period of time. There will likely be short term rallys. If you mistake a short term uptick in the market as a good time to invest, the market can still easily turn on you and go back to falling prices.
  Everything you say is correct, the only thing I would caution is that it is absolutely not so clear when things begin to improve. It is often when things appear to be darkest that there is the best buying opportunity.

To sum up, be careful. By all means exit the market if you are not comfortable with where you think the market is headed. But you can also be partially invested, it does not have to be an all in or all out thing.  This way you would be positioned for a recovery should it happen more quickly than you expect.

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com