Things to Think About if You’re Thinking of Selling
With Monday’s stock market fall prompting fears of further declines ahead, many less-experienced investors in stock mutual funds and 401(k) retirement savings plans might be wondering if it’d be smart to sell now and cut losses.
How hard is it to reduce your risk in such investment vehicles? Is it too late to sell--or would it be by the time your mutual fund or retirement plan sponsor was able to get you out?
Some questions and answers:
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Q What should I do? I’m scared of a crash--and I’m not enthralled by the idea of slow or no growth in my stock portfolio, either. Is it time to sell?
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A If you have a longtime horizon, a temporary market decline--no matter how steep--shouldn’t bother you. Nor should a lackluster year or two.
Despite occasional stomach-churning declines, such as those experienced in market crashes in 1929 and 1987, those who have held on to their stocks for long periods have reaped substantial rewards. Stock prices, on average, have gained 10.5% a year during the last 70 years. That’s likely to continue.
However, if you will need the money you have invested in stocks in the near term--within the next three to five years--you would be wise to figure out how much of a loss you can tolerate. Although double-digit annual losses are unusual--they’ve occurred just eight times in 70 years--they’re not unheard-of.
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Q I invest through mutual funds. If I place a sell order today before the market opens, will I be able to limit my losses to what they are today?
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A No. Generally, when you redeem mutual fund shares, you get the closing price as of the end of the trading day. If you put in a sell order after the close of trading, your sale would be processed at the end of trading on the following business day.
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Q What about selling in my 401(k) plan at work? I’ve got nearly all of my assets in stock funds, and I’d like to cut my losses if I can.
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A The rules on selling through a 401(k) plan vary. However, usually it takes at least a day and sometimes as long as 45 days to process a buy or sell order through one of these self-directed retirement plans.
If your plan promises “next-day switching,” you can expect that the rules will be similar to ordinary mutual fund rules. You get the closing price on the day you sell, provided you place the order before the market closing. However, if your plan has a close-off date--in which you can switch funds only before a certain day of the month--the price you get will depend on when the plan administrator actually sells. It could be better or worse than if you’d been able to sell immediately.
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Q If I’ve got to wait a week or a month to sell is it worth it to sell at all? I’d like to cut my losses, but how am I to know what prices are going to do a month from now? And with the lead time necessary with my 401(k), whatever order I give today might be inadvisable by the time the trade is actually completed.
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A Retirement savings plans, such as 401(k)s, are long-term in nature. You shouldn’t expect to trade the way you would with an individual stock or bond. Thus, you should take a long-term view when looking at that portion of your portfolio. Given your feelings about risk, your age, assets and ability to recoup your losses through earnings, are you comfortable with your current investment mix? If not, you should rebalance your portfolio regardless of how the financial markets perform.
