Dow 10,000: It’s do-over time!

By Felix Salmon
October 15, 2009
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Remember the grim days of March? You should. Millions of small investors across the country were staring aghast at their brokerage statements, with one thought going through their heads: “I should never have invested in the stock market”. They’d done so on the advice of people who had assured them that stocks always go up over the long term, and then they’d seen their holdings decimated. In hindsight, they decided, they had less of a risk appetite than they needed to have that kind of exposure to the stock market. But selling at the bottom and capitulating to the bear felt impossible.

The good news is that the current stock-market rally has given them a second chance. If you’ve been diligently putting money into stocks for years, there’s a good chance that the current value of your portfolio is not hugely lower than the total nominal amount saved. If you had an idea, back in March, of what your risk appetite really was, then now’s the time to rebalance your portfolio in line with the degree of risk aversion you discovered in yourself seven months ago. If and when stocks drop again, then you really will only have yourself to blame.

Of course, everybody’s individual situation is different, but in aggregate we’ve gone from devastation to mere pain. And when you’re involved in something painful, and you can get out of it, a quiet exit is often the best thing you can do. Of course, stocks could go up further from here. But that’s not the point. Unless you can afford to see your stocks fall, you shouldn’t be invested in them.

You don’t need to sell all your stocks, of course. Some exposure to equities makes perfect sense. But make sure you have a decent cash cushion first. And if you have any kind of debt at all — even if it’s just a mortgage — there’s a strong case to be made that you should pay that down by selling your stocks. Paying down a 6% mortgage is the functional equivalent of getting a guaranteed 6% return on your money, risk-free. (Ignoring the tax benefits of having a mortgage for the time being.) That seems a lot more attractive than buying stocks at these levels.

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