Aug 23, 2007

Great Debate over at AFM: To Sell or Not To Sell?

I'm sorry I didn't have a chance to post this before I went to work this morning, but there's a great debate going on over at All Financial Matters in the comments to this post criticizing a post over at The Simple Dollar. To sum up, The Simple Dollar's Trent wrote a post advising a reader who was uncomfortable with the stock market plunge to take her money out if it would make her feel better, and then reinvest when she felt more comfortable. AFM's JLP has taken Trent to task for this advice, pointing out that the best way to maximize a stock market investment is to stay put for the long haul. The comments are full of people agreeing with JLP, Trent's response to JLP's post, JLP's response to Trent's comments, Trent's response to JLP's comments, and so forth.

It's interesting to see the strong emotions - especially Trent's, as he stands by his original position despite all the arguments to the contrary. I have to admit that while I usually read The Simple Dollar every day, I glossed over his original post because I'm not interested in the advice he's giving a reader about her investments. I have my investment strategy (index funds, dollar cost averaging, buy and hold) and I'm not looking to educate myself further right now (due to time constraints, as I've mentioned previously).

However, I think the biggest problem is that Trent never mentioned asset allocation. Based on her question, it sounds like the reader's 401(k) is entirely invested in growth funds. She asked if she should move some of that into a money market to wait out the stock market's losses, then reinvest when the market turned around. Trent told her that she shouldn't have an investment that's causing her to lose sleep - so maybe the biggest problem is really that he didn't answer her question. She didn't say that she was losing sleep, she was really asking if she should time the market to mitigate her losses in the growth stocks. In any event, investing entirely in growth funds is a bad idea - hasn't she ever heard of diversification? I think what Trent should have told her is that it would be a great idea to move some of her 401(k) money out of the growth funds - not into a money market, but rather into bonds. Her peace of mind needs to come from diversification - otherwise, she'll just end up stressed from not having any investments that are growing to meet her retirement needs.

This is also a great time to bring up Mapgirl's post on why you shouldn't trust personal finance bloggers. Very few bloggers are experts, and I'm pretty sure no bloggers owe a fiduciary duty to their readers except in extremely rare circumstances. We all just offer our own opinion, based upon on our personal beliefs and experience. But it's up to each reader to make the most of his or her own money.

The debate continues on The Simple Dollar in the comments here.


JLP said...


Good post.

I think asset allocation is the key. That, and you must have the ability to stomach some volatility. It can't always go up, nor can it always go down.

I would have answered her letter differently either by following-up to get some more information or by offering more general help. I certainly wouldn't have told her move all her money into a money market account!



Rob The Trader said...

very good! I know the post you refer to and I never picked up on that! Asset allocation, next to low cost funds is the real key.

mapgirl said...

Thanks for the link, Cathy. I actually have my own direct comment post today after reading JLP's post. It echoes a lot of the same comments you make. I just feel very bad for people who need to learn more about investing when they ask for help and the first piece of advice isn't "Educate yourself".

ChiefFamilyOfficer said...

@JLP and Rob - Thanks.

@Mapgirl - You're absolutely right. The first thing Trent should have said was "You need to learn about investing."

Anonymous said...

Another thing about investing, is patience. Unless you are getting close to "the end", (in which case your money should be very low risk) you need to keep in mind that the market will always come back.