Read This Before You Sell All Your Stocks

We knew it was coming, but it's the news we've all been dreading. Yet there it was recently, front and center in The Wall Street Journal:

"Rank-and-file investors are losing faith in stocks."

The story is predictable
Yesterday, after all, we experienced yet another near-4% drop, plunging stocks close to their bear-market lows of November. Small investors, shell-shocked by losses this year, are selling what's left of their stocks and stashing cash in bonds and FDIC-insured CDs. According to recent data from the Investment Company Institute (and reported by the Journal), "Investors pulled a record $72 billion from stock funds overall in October alone ... [and] fund companies say withdrawals have remained heavy."

Indeed, Journal writer E.S. Browning profiles three such investors. The first, a 52-year-old, was "a big believer in stocks in the late 1990s" but is now putting all of his cash in CDs. The second was an aggressive investor in the 1990s, but moved to "a more conservative mix after the 2001 terrorist attacks" and has since become more conservative. And the third, a 25-year-old, loved stocks when he was earning 10% to 20% per year earlier this decade, but has now "shifted his retirement savings to corporate bonds, a money market fund, and a few utility funds."

That'll work out well
Look, let's get this out of the way right now. There's a place for bonds, CDs, and smart asset allocation in every portfolio. But what these three investors have in common is that they were buying stocks when they were high and going higher and are now selling stocks when they're low and (potentially) going lower.

In other words, they bought high and sold low ... exactly the opposite of what you want to do as an investor!

Now, I can understand the 52-year-old's motives better than the 25-year-old's. The former is nearing retirement and wants the security of a stable cash nest egg. But the latter is at least 30 years (probably more) from retirement and is likely dooming himself to decades of subpar returns.

Provided the reporting is accurate, of course
Given plummeting interest rates, the best money market rate I can find today is 3% per year. At that rate, $10,000 will turn into about $24,000 over 30 years.

As for stocks, they don't generally decline 40% per year (as they did in 2008) all that often (though such declines are difficult to predict). In fact, over the trailing-30-year period stocks have returned about 7.6% per year -- which would turn that same $10,000 into about $90,000 ... a pretty darn big difference.

All of this is to say, if you have plenty of time until retirement (let's call it 10 years or more), now is the time to be a buyer of stocks. Given depressed valuations, you may even do better than 7.6% per year. And even if you're nearing or in retirement, chances are you have some money that you don't intend to spend for another 20 or 30 years. Those long-term savings are also a candidate for the stock market, though again, you'll want to have a sound asset-allocation game plan in place before you invest.

Think about it
If you believe Google (Nasdaq: GOOG  ) and Amazon.com (Nasdaq: AMZN  ) will be dominantly profitable media titans 25 years from now, would it be better to buy the stocks today at $350 and $60, respectively, or to have done so 12 months ago when they were 15% to 30% higher?

That's not to say they can't go lower from here, but when you buy stocks, you should do so with the same time horizon as your money.

Similarly, if you believe China is the next global economic superpower, then you can't beat today's prices for China Mobile (NYSE: CHL  ) and PetroChina (NYSE: PTR  ) , the country's telecom and energy giants, respectively.

Finally, even if you don't believe in any individual stocks, you can still park your long-term money in a low-cost total market index fund (Vanguard's Total Stock Market Index (VTSMX) is a good choice), which will give you exposure to fantastic, dividend-paying firms such as Coca-Cola (NYSE: KO  ) , Procter & Gamble (NYSE: PG  ) , and Microsoft (Nasdaq: MSFT  ) .

Yet these are the stocks investors are selling today. It just doesn't seem to be the smartest long-term move.

This is ...
At Motley Fool Global Gains, we believe in taking advantage of temporary market downturns to position our portfolios for the long term. We also believe that thanks to development in places such as China, India, and Brazil, the next decade will prove to be a very exciting and profitable time to be an investor.

If you agree, then click here to join us free at Global Gains, where we identify two of the world's best buying opportunities each and every month.

Rather than run from stocks, we are taking advantage of current volatility to buy some of the world's best companies. You should consider the same.

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Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of Procter & Gamble. Amazon.com is a Motley Fool Stock Advisor recommendation. Microsoft and Coca-Cola are Inside Value selections. Google is a Rule Breakers pick. Please congratulate the Fool's disclosure policy on declaring itself the world's best.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2009, at 4:17 PM, imalost wrote:

    Why would you buy Amazon here when it selling at 45 times earnings when this years earnings are going to be lower than last year and its a retail stock ? Would it not be wise to wait until it comes down to decent market multiple and then buy. Thats two articles Motley Fool has had on Amazon. This site pumping of this stock is unreal. You mean to tell me there are no better values out there than a bloated retail stock selling at an exorbitant PE with declining revenues?

  • Report this Comment On February 18, 2009, at 4:53 PM, Guthree wrote:

    Where are you finding 3 percent MM rates? My "good" one pays 0.98 percent.

    I agree totally with your article, btw. But I'm not sure many people can follow your advice. They get too happy at the top and too sad at the bottom. Plus, a bottom might last a long time. If they are equivocating, they have to remake the decision not to sell every day. They only have to decide to sell once.

  • Report this Comment On February 18, 2009, at 5:06 PM, wuff3t wrote:

    I think Buffet said the most important characteristic for the successful investor is temperament. This market is testing that assertion to the extreme, and it looks as though many investors simply don't have it. Well, I'm selling nothing. Unless the entire world decides to just stop even trying to make money, economies and markets will recover and one day thrive again. It's not for me to give anyone advice but I'm holding all my shares and spending more time NOT following the daily market movements.

    I don't know if holding now (and even buying more, which I will as and when cash becomes available) will make me rich in the long run - but I do know that selling now won't...

    Good luck all...

  • Report this Comment On February 18, 2009, at 5:44 PM, sgmorr wrote:

    The thing that really bothers me about investment "advice" is the notion that you're a loser if you don't have exposure to the stock market; that otherwise you'll never keep pace with inflation as you move toward and into retirement.

    Well, just because a person needs or wants good rates of return does not mean that the stock market will give them. Our "need" as investors to get a higher rate of return than savings accounts, money markets, CDs or Treasury bonds does not mean that we all can or should "invest" in the stock market.

    Right now I'm looking at a chart showing the course of a $10,000 investment from 1997 through Oct. 7, 2008. You'd have $26,488 had you been in 30 year Treasuries, but only $13,449 had you been in the S&P 500. That's a pretty sobering thought.

    It's almost a no win situation for the ordinary small investor. If we buy and hold, we lose. If we try to time the market, we lose.

  • Report this Comment On February 18, 2009, at 6:14 PM, pgoel6uc wrote:

    I am assuming that you didn't take into account the dividends market has given out in the time period you mentioned. Include those in your analysis, and you might surprise yourself!

    True, the result is still sobering, and I do still agree with your analysis.

  • Report this Comment On February 18, 2009, at 8:22 PM, imalost wrote:

    Would it not be wise to take profits on a stock like Amazon who will have zero growth and sells for a PE of 45 ? How much upside can you have on a stock like this ? Obviously the risk to the downside is greater. Even if it lost 50% of its value its PE would still be higher than Apple and twice E-bay.

  • Report this Comment On February 18, 2009, at 9:31 PM, SteveTheInvestor wrote:

    Well basically, the way I see it, we are dangerously close to an economic collapse in one form or another. Until I believe that danger has passed, I honestly don't care how cheap stocks get. I'm heavy in cash and I'm keeping it that way.

  • Report this Comment On February 18, 2009, at 10:37 PM, blunney wrote:

    "Rank-and-file investors are losing faith in stocks." Another simplistic sound-bite, baiting the news-consuming masses, like this "knowledge" will do them some good.

    Rank-and-file investors aren't losing faith in stocks. They're losing faith in the integrity of the management of the companies who issue the stock. Note the difference: the stock isn't to blame, crooked, feather-bedding executives are.

    I for one no longer contribute to my 101-k. I don't see the point in giving Wall Street my money to play with and confiscate. That's right - 101-k. I've lost 75% of my retirement funds. I'm 50 - I don't get to retire.

    And you wonder why I have no faith in the stock market...

  • Report this Comment On February 18, 2009, at 10:49 PM, imalost wrote:

    Look at what is happening intense hype for Amazon and its gone up 80% since the November lows an 30% since 4th Quarter earnings. Even thought they said that 1st quarter earnings may decline 37%. Its because the insiders are massively dumping the stock and it was brought up to accommodate them. The small investor always loses because the hype gets to a fever pitch at the top,

  • Report this Comment On February 19, 2009, at 1:29 AM, sgmorr wrote:

    If I might add one more thing, this about 401k accounts. The travesty with the way many of these are offered is that many times there is no cash, CD, or bond options in the investment mix. Frequently the mutual fund offerings are also very limited. So the old canard about invest, invest, invest in your company's 401k plan results in many people just pouring money into "the market" and being hit with hand over fist losses during the recent year, or indeed, in the period from 1997 to the present, as I noted in my previous post regarding the performance of the S&P 500 vs. the 30 year Treasury.

    401ks were an invention to allow companies to get out from under defined benefit pension plans and have been touted as some kind of investment nirvana for the small investor/working person.

  • Report this Comment On February 19, 2009, at 9:06 AM, BTK71 wrote:

    Maybe it's because I'm a long way off until retirement but I am not bothered by the downturn in the economy and the prospects for long term returns. I don't invest in individual stocks with the intentions of getting rich in a short period of time. I, as the MF preaches, find quality companies that have solid balance sheets, little debt and hold advantages over competitors.

    I am excited about the potential of my portfolio over the next several years and am looking forward to adding more to it.

  • Report this Comment On February 19, 2009, at 1:08 PM, robk100 wrote:

    I'm sure this question requires a lot of back and forth Q&A, but its been eating me up and thought I would try here before going to the other boards.

    Here goes: Does it make sense to sell stocks that are down anywhere from 40-60% so I can get some cash to pick up some of the other bargains that are out there now?

    I ask because outside of my 401K (still buying), I don't have cash at the moment to pick up anything new and exciting :)

  • Report this Comment On February 19, 2009, at 3:31 PM, opt01 wrote:

    I've been managing money for over 20 years and this market is truly separating the boys from the men and the men will truly be rewarded in the next few years so stop listening to all the pessimists. We've become a society that wants immediate gratification and society that want to throw blame at everyone but themselves. If my house doesn't appreciate the day after I buy it, it was the mortgage company's fault. If I invest in a too good to be true ponzi scheme, it's the Government's fault. If I invest in the stock market for my retirement (30+ years away) and it hits a pothole, get me out. I'm not sure of the exact date of when the stock market will turnaround, no body does. I do know that if people keep acting as though the world economy is coming to an end, you might just get what you're asking for.

    I'm made a lot of money in this market by keeping a level head. First, the muni market (when everyone thought that every state Government was going bankrupt), and now the corporate bond market. As far as the stock market goes, I'm 46 years old. The last great depression was almost 30 yrs ago. I may never get another buying opportunity like this again. You better believe I'm buying. Hey folks, it's a KMart Bluelight Special and EVERYTHING IS ON SALE!!

  • Report this Comment On February 20, 2009, at 11:17 PM, certifiedbodyman wrote:

    Buffett said it best "be greedy when others are fearful and be fearful when others are greedy"...my move will be soon...as soon as I can decide on the best dividend paying stocks...GE, MO, and a few others are looking good...it's coming soon too with the new lows established. I've never seen or heard so much pessimism as now. This truly is a once in a lfetime chance if you're disciplined and think through the process. Good luck all...

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