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Should You Move Your Investments to Cash?

April 20, 2009 | Credit Cards | No Comments

We are all tempted to shift our assets out of stocks into cash, especially in our 401K plans where most of us have taken a beating over the last several months.  However, remember when investing in stocks and mutual funds it’s never a realized profit or loss until your sell.  If you sell now, you’ll lock in your losses.  But if you shift to cash in a bear market, you are likely to miss out on an eventual rally.  Rallies tend to occur quickly and compressed.

The best way to survive a bear market is to stick to your plan no matter how far the market falls. Keep contributing to you employer-sponsored retirement savings plan and allocate your assets in bonds, stock, and fixed income based on when you will retire.

Below is a graph that shows the outcome of a hypothetical portfolio worth $100,000 at the market’s peak on January 1, 2001.  That chart shows that if the hypothetical investor had moved to all cash at the market’s bottom, the investor would have missed out on a substantial growth opportunity.  After 3 years, the investor would have missed out in $33,197 in gains after 3 years and $55,200 in gains after 5 years had the investor moved his money in cash.

Chart: Move to Stocks vs. Stay in Stocks

graph

Source: T.  Rowe Price

Remember that over the past 80 years, through all the bear and bull markets, stocks still returned about 10% yearly, on average.  One hundred dollars invested in stocks at the start of 1926 would have grown to $324,600 by end of 2007, despite the Great Depression, World War II and 14 bear markets.

 

 

 

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