Don't Sell Your Home

The stock and bond markets worldwide have been in upheaval the last several weeks. Panic has gripped the markets as investors run for the exits. As the markets continue to go down, even seasoned investors find themselves asking how much pain they are willing to take. What should you do? It’s important to recognize that the market gains have not been following traditional patterns. From July of 2006 to July of 2007, the DJIA went up 30%, way above the historical yearly average of 10%.

But the DJIA’s recent drop of 8.5% isn’t out of the norm. According to information compiled by American Funds, a look at the markets since 1900 shows that a decline of 5% or more typically occurs about 3 times a year and lasts 47 days. A decline of 10% or more occurs about once a year and a decline of 20% or more occurs every 3 ½ years.

Equity-based investing provides higher long-term returns than fixed investments because there is more fluctuation along the way. Equity investors must recognize that retreating markets are normal and too be expected.

I believe that the current market decline has not been based on fundamentals and thus current share prices do not reflect the true underlying value of companies. It’s common for markets to be over-bought or over-sold at any given time. When that occurs, they can reverse course fairly quickly.

ExxonMobil is an example. They have some $40 Billion in cash, no debt and sell a product that will remain in high demand for years to come. Yet their share price has dropped 12.5% in the last month.

There are many other companies like ExxonMobil where the share prices don’t reflect the underlying value of the company. There are closed-end bond funds that aren’t going to be heavily impacted by the current liquidity crises. Yet their shares have been hammered like everyone else. The list could go on and on, but I think you get the idea.

The bottom line in most investors’ minds is what they should do now. There are a few courses of action that you can take.

First, you can sell your holdings and move everything to cash. The key question for those taking this course is when will you get back into the market? If you move to cash and wait for the markets to recover, you won’t have participated in that recovery. The interest earned in the meantime won’t do much to offset the current loss. If you don’t plan on returning to the markets, how will that affect your longer-term goals?

Second, you can sell a portion of your holdings. This will decrease the downside risk while still allowing you to participate in any recovery. The more you withdraw, the less the downside risk and the longer it takes to recover.

Third, you can maintain your current holdings. If you feel that current share values don’t accurately reflect the true underlying values, then you can weather the storm.

I believe that your decision should be based on two things. The first is your time-frame. The second is your emotional ability. If it is too difficult emotionally for you, then you should probably look at options 1 or 2. For those with longer-term views and the emotional wherewithal, I recommend option 3.

Whichever option you choose, you should keep your goal in mind. Think of it in terms of your home. The current credit crisis combined with the ‘housing bubble’ has negatively impacted home prices. Most likely, the value of your home now is considerably less than it was 1 year ago, perhaps 10% or even 20% less.

Are you selling your home? If not, why not?

What you will probably see is that you aren’t selling your home because you know it will recover and continue to go up in value. And it’s providing you a place to live in the meantime. Moreover, if you sell your home you will have to do something to have a place to live—either buying another home or renting. Neither of those will make much sense.

Your investment portfolio should be viewed in a similar light. It is designed to increase your purchasing power—to protect you from inflation over the long-term. And it should continue to do so.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.