Expert: Steve Hach - 7/18/2011

Question
Hi,  I am worried as we get closer to no deal on the debt cieling, and especially when Aug 2 comes and if there is no deal, that the stock market will tank and I will lose a lot of money in my mutual funds. Since I am 32 years old, the majority is in the stock market.  Granted I have over 30 years until I need the money, but I don't want to see my portfolio take a major hit.  I am inclined to sell a bunch of my mutual funds and put the money in money market accounts for a little while so I won't lose as much.  Any advice?
Thanks

Answer
Hi RL,

well, the short answer is "yes," of course you should sell all of your stocks if you are sure that the market is going to tank on August 2nd.

Why wouldn't you sell all of them, or better yet, put the money on an ETF which shorts the markets?

But here's the problem, what if you sell all holdings, take a huge tax hit along with management fees and such, and then the market doesn't tank?

What if the market goes up because as a whole the powers that be and invest decide that the debt crisis was GOOD for stocks?

You cannot predict what will happen, if you could then it would be a no brainer.

Also, what if you put the cash into money markets and then they "break the buck" and you lose on that?

See the problem?

Now, if you are really worried and want to preserve your capital by reducing your risk exposure, then I would research all of the tax and fee ramifications VERY carefully.  

If you can move from some funds into a safer bond fund or money market fund without getting hit with penalties and onerous fees, then I see nothing wrong with that-- if you want peace of mind.

But, while the advice to always be fully invested all of the time is probably wrong for some people--especially those with such a long time til retirement, individual investors are horrendously poor at market timing and usually end up selling low and buying high over and over again.

I recommend you check out your options for safer investments for the short term and if you can move money without getting nailed on taxes and management fees then go ahead and do it if that gives you better sleep at night.

but keep in mind that the crisis may not come to pass or it may actually benefit equities rather than blow them up.

I would also make sure you have proper diversification within your portfolio.  It shouldn't all be in US equities, it should have additional international exposure--many people like Brazil.  It should also be a mixture of bonds, stocks, perhaps some commodities, etc.  Make sure you aren't over-allocated to your own company's stock if they offer that sort of thing, etc.

The main thing is to save money, avoid debt, and keep socking it away for your future.

The longer the time horizon you have--and 30 years is long, the easier it is to garner great returns due to compound interest.

Best,

Steve