AboutJay Kay Expertise As a private investor for the past 40 years, I have experienced both bull and bear markets, and have lived to tell the tale. I should be able to provide you with serious, practical insights into managing stocks, bonds and mutual funds in your portfolio, along with useful information concerning most aspects of personal finance. No specific stock/bond recommendations furnished.
Expert: Jay Kay Date: 1/3/2007 Subject: Market correction
Question Jay, I'm 50 yrs old and invest in my company's 401k plan. I've heard a lot of rumor lately that the market is due for a big correction. Is there what you feel would be the ideal versification to plan for this eventuality, so that the impact is minimal on my portfolio? I currently have 10-15% in foreign stock, 30-40 in growth stocks, 20 or so in a blue chip fund. Off-hand I don't remember the entire breakdown, but I'm concerned that I need to adjust. It's doing well, but I lost quite a bit in the 2000-2001 adjustment and I hope to avoid a repeat performance. Thanks for your time.
Answer One of the classic Wall Street anecdotes concerns a guru who was asked by an eager innocent what he thought the market would do. His sage reply was: "It will fluctuate."
It always has, and I'm sure it always will. Your question asks me to forecast the timing of the overall market in regard to its next correction. I wish, for my sake as well as yours, that I could do this. Based on the information you have supplied, your portfolio seems altogether reasonable for a 50 year old. You do not indicate how much the portfolio is worth, or how much more you will need to retire comfortably, or how much longer you plan to contribute to it, or what other assets you own...or a sizable number of other things that should affect your financial decisions. In fact, except for your having heard rumors of a "big correction," you do not indicate why you feel the market will decline. What you lost in 2000-2001 is irrelevant in the present circumstances. Anyone who has been in the market for a considerable period of time has suffered losses. There are always rumors of a decline - particularly during and after a period of rising stock prices. The forecasters are out in force concerning 2007. Some expect another good year, some expect a decline. Some will be right, some will be wrong. If you reduce the stock component of your portfolio you may make an expensive mistake...or you may emerge looking like an absolute genius. The consensus seems to be that 2007 will not be as good a year as 2006; it may even be a down year. But, as we all know, sometimes even the consensus has been wrong.
If your long-term needs are being met by your 401(k), and if you will continue to contribute to it, there are going to be times when a decline in its value must be expected - not because it happened in 2000-2001, but because that is the nature of long-term investing. If you are out of the market when it rises, your capital will diminish precisely as it would if you were invested during a decline. So when all is said and done, your fundamental question is: Will the market suffer a substantial decline in 2007? I don't know, and neither do you. In your circumstances, the portfolio seems well distributed.....but someday, some year, somehow, it will decline. If you are satisfied with the stocks and funds you own, don't panic if there is a market correction: prices will not go down steadily any more than they will ever go up steadily. I know it's easy for me to urge you to forget what happened in 2000-2001 because it didn't happen to me, but if I were in your position that is what I would try to do. You learned from that experience and you are capable of making a more informed decision than listening to what you yourself term "a lot of rumor."
In any event good luck. It is what you, I and every investor needs.
