Friday, March 27, 2009

Are Market Declines Bothering You More Than They Should?

Everyone has felt the sting of the faltering stock market. The decline in retirement account values causes people to react differently: some sell their stocks and move to cash, some hang on for dear life, and others haven't had a good night's rest for 17 months. The question I would briefly like to address is, "how concerned should I be about my nest egg?" Simply, the answer to this question depends on when you are going to need the money in your savings.

We all know the equities market has lost approximately 50 percent since its high in October of 2007. Most people are also aware that the housing market has also struggled lately. Given that both markets are down, ask yourself "am I more concerned about the value of my retirement accounts, or my home?" Let me guess, you answered that your nest egg is your biggest concern. Why? Is it because you feel your equity investments have declined more than your home's value? If so, sorry to inform you of this, but you may very well be wrong.

As you can see, median home prices have declined to levels not seen since 1979! The pullback in the housing market far exceeds the decline in the stock market, which is at levels last seen in 1996, on an inflation-adjusted basis. Thus, the severity of the pullback isn't the only factor to cause you to worry more about your stock investments than your home.

Let me suggest an alternative factor. If you aren't currently interested in selling your home, there is no reason for you to care about the market value of the home today. You only care about what you can sell your home for the day you want to sell it, which may be five, ten, or thirty years down the road. Not being concerned with the value of your home today allows you to sleep well at night, regardless of the massive fallout in the real estate market.

I suggest you take the same mental approach to your equity investments. If you aren't planning on retiring soon, and won't need to take withdrawals from these accounts within five or seven years, don't worry about what the stock market does now. We have one hundred years of history that suggest the stock market's value will increase over time. We recovered from the great depression, the crash of 73-74, and the bursting of the tech bubble. Sure, it won't be pretty in the near term, but if we can be confident that prices will recover by the time we need the funds, let's stop losing valuable sleep.

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