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Q & A:

December, 2008

Q: Is it stupid to sell my aggressive stock fund now and lock-in these losses?

Q: Like many, my 401k has turned into a 201k.  I am much more receptive now to the things you’ve been writing about than I was six months ago.  The problem is it seems stupid to sell my aggressive stock fund now and lock-in these losses.

A: In business school, they drilled into us the idea that we should ignore sunk costs.  This is easier to accept analytically than it is psychologically.  You naturally want to recoup at least part of your losses before you sell to diversify.  The problem with this natural tendency is that it contains the implicit assumption that, starting today, your aggressive stock fund will do better than what you would buy if you had your asset allocation where you would like it to be.

In this month’s allocation, I have three times as much allocated to precious metals as I do to domestic stocks.  This is because, given where we are today, I think precious metals will do better than stocks.  You may agree with me, but you don’t want to sell your stocks now after they’ve dropped so much.  If you wait, stocks may indeed have a bounce.  Then you could sell and buy some gold.  The problem is that, if we’ve been right, gold will have bounced even more than stocks and you’re still worse off than if you had just bought gold before either bounced.

If you wait, in essence you’re saying, “I think gold has better long-term prospects than stocks, but maybe in the short-term stocks will outperform gold.”  This may happen, but it is not an investing strategy.  It is simply a hope.  You’re hoping that in the short-term prices move against your long-term view so that you can implement your asset allocation change when the relative returns are even more advantageous.  This is simply trying to time the market based on hope.  It may work this time, but unfortunately, that’s even more dangerous to your long-term financial health than if it doesn’t.

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    September, 2011

    Going to the Johns–Mauldin and Hussman

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“...an investor who proposes to ignore near-term market fluctuations needs great resources for safety and must not operate on so large a scale, if at all, with borrowed money. Finally, it is the long-term investor, he who promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committee or boards or banks. For it is the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness, and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

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©2009 PlumbReport.com

The opinions as to portfolio allocation and specific investment vehicles contained herein are solely the opinions of the author and are not intended to be specific recommendations which would be suitable for every investor. The suitability of any specific investment or recommendation is dependent upon many subjective factors and characteristics of the individual investor including, but not limited to, particular investment objectives, risk tolerance, investment horizon or timeline, net worth, overall portfolio allocation and income needs. Specific investments may be suitable for some investors and yet unsuitable for others due to different needs and objectives. All readers should carefully consider their individual objectives and needs and should consult with their investment and financial advisor as to the suitability of any particular investment. The author specifically disclaims any liability or responsibility for any losses, which may result from any investment or allocation referenced herein.