A friend at work asked me yesterday essentially the same question.
This a complex question with risks either side (sell or not sell). I recommend you take a half a day (or more!) this weekend and read some various opinions, such as links below, and others you discover. Then you decide how you feel on these questions:
Do you think THIS is the bottom for US stocks, or are we going significantly lower? (Stocks are now down over 40% now, for example, on the S&P500)
Do you expect Mild recession, average recession, or deep recession/depression?
If you conclude we are near the bottom (within 5%) on stocks from Oct. ’07 peaks, then CERTAINLY hold onto those funds, and maybe only adjust their amounts in rebalancing your portfolio to include whatever better bargains the recession brings forth (gold, cheap oil stocks…etc).
If you conclude this market will likely go much lower before this is all over, then you might set an alarm to beep / email you when the S&P500 climbs back to say 1095, which I expect before the end of this year.
Back up to 1,100?
*pause*
(to allow the laughter of the bears to die down)
OK, so on that S&P500=1095 alarm, then dump ALL STOCKS.
Explanation: I am very confident that probably before the end-of-year, we’ll see a rally that brings the S&P500 up to 1100. When markets fall this far, this fast, there just has to be a good rally – at least that’s my theory! However, personally I believe it will be a “fool’s rally”; that is a bounce off a temporary bottom, before we continue to head much lower. I bought a lot of stocks today. If the markets drop tomorrow, I’ll buy more!
OK, let’s say you’re able to dump those funds with the S&P500 at ~1100. Now you have some breathing room below (to the hypothetical market bottom) with which to hedge/short stocks to reclaim lost funds. Then:
OPTION #1: SAFER OPTION: could use the proceeds to buy gold via SPDR GOLD TRUST GOLD EFT (“GLD”) and then hold it for at least five years. Now this assumes you’re able to buy gold below say $1100. If gold is by then say $1500, you might conclude you’re too late to buy gold. Some people see gold hitting $1500 within a year, some see it hitting $2000 within a few years. You decide if you believe them or not. I believe we’ll see over $2000/ounce within five years, possibly within three years.
Do you think the stock market will DOUBLE (like gold WILL) in five years from a hypothetical starting point of S&P500 = 1,100???? Hell, by then the stock market could be at S&P500 = 600!
OPTION #2: RISKY OPTIONalternatively, after dumping those funds at say S&P500 = 1095, you could use that cash to GO SHORT the NASDAQ and S&P500 with either ProShares Short (SH, PSQ) or ProShares UltraShort (SDS, QID). I strongly recommend you use set limits to sell when S&P500 hits say 900. (So much volatility, so easy to miss your sell point without an alarm.) When you buy those short stock ETF’s, be prepared to ride though some rough water because a fool’s rally might easily take the markets higher by 5% or 10% after you buy.
Personally, I think the global economy is grim and getting worse. So I expect to see 800 (or lower) on the S&P500 within twelve months – or maybe next week! It will probably take another six months for unemployment in the USA to hit 8%, and in CA over 10%. Also as we move into 2nd quarter of next year (or earlier), very poor corporate profits will then be widely emerging, so that will also tank the markets.
In order to buy either the ProShares ETF’s, or the SPDR GOLD TRUST GOLD EFT (“GLD”) in your 401K you’ll likely have to submit (if you haven’t already) a form requesting rights to buy/sell individual stocks/funds in your 401K.
Considerations:
The short and (especially 2X ultra-short) ETF’s are very aggressive = risky, especially this close to the bottom. A financial advisor would probably recommend not to put more than 10% or 25% of your entire retirement portfolio into such risky shorts.
No matter what you do I strongly recommend you buy gold with at least 25% of your TOTAL portfolio and plan to hold it long-term (five to ten years). I view that as the sure bet.
BEST CASE SCENARIO – this assumes Fed / Congress quickly passes a second but actually helpful bailout package of at least one trillion – BEST CASE SCENARIO: Nouriel in this case, predicts a 12-18 month deep recession, worst recession since 1929. He explains in teleconf what is his definition of helpful bailout package.
If the right bail out is NOT passed, then MIDDLE GROUND SCENARIO: Nouriel predicts Japanese-style deflationary period (which lasted ten years in Japan), which of course includes a terrible economy during that ten years.
