I’ve counseled dozens of people since October and I’m hearing a recurring message from investors with 401k plans: “I’ve decided to go to cash and wait for things to level out”. My advice is to do quite the opposite.
Choose a good allocation of stocks and bonds and max out your monthly investment. Those investors that have made their monthly contributions diligently since October of 2008 are going to make a lot of money over the long term. In fact, for pre-retirees, this market is a Godsend. By dollar-cost-averaging into the market at its decade-lows they will see fabulous results over the next five to ten years.
It’s human nature to project whatever market environment we are currently experiencing into perpetuity. So if we’re in a bull market, investors expect the market to rise steadily forever. If we’re in a bear market, that’s what investors expect from now on (remember how the Great Depression influenced the generation that lived it?). We’ve had a horrendous experience since October of 2008, but this is not our new paradigm. Sir John Templeton wrote, “The four most dangerous words in investing are, ‘This time it’s different'”. Those words pertain to negative as well as positive expectations. We will see a reversion to the mean and a return to historical risk and return characteristics where stocks will outperform cash and bonds handily. Be sure you are well-positioned for that eventuality.