What should you do? The market has lost more than half of its value.

It's Time to Sell and Walk Away
By John Rosevear (TMF Marlowe) March 5, 2009 Comments (40)

There's no escaping this truth: The market has lost more than half of its value since it peaked in October 2007.

It could go even lower -- and it probably will.

Things are getting worse. If you have any home equity left, it's still shrinking. General Motors inches closer to Chapter 11 every day -- and General Electric (NYSE: GE) is confronting some mighty problems of its own.

Our entire banking system seems on the ragged edge of collapse, as nervous investors wonder who AIG's counterparties are and fret about the true financial condition of institutions such as Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). Layoffs continue at a torrid pace, as companies such as General Dynamics (NYSE: GD) and Tyco Electronics (NYSE: TEL) join the very long list of companies adjusting to new economic expectations.

It's going to get worse before it gets better -- if it gets better. Some folks are saying there's no way out -- a huge collapse might be in the cards. At best, they say, we're looking at a decade or more of high unemployment and stock market misery.

This is the time when you look at your decimated portfolio and wonder how much more you can take. This is the time when many pundits remind you that the "buy and hold myth" has been "debunked," and that the "smart money" is already in cash, waiting for the bottom. This is the time when the temptation to join them is overwhelming.

This is the time when you sell it all and walk away,

There's just one catch

But if you act while you still have something left to get rid of, answer this: What do you do after that?

I mean, great, you sold. Congratulations. Now what?

You can leave what's left in a money market fund that earns a whopping 1%. You can buy gold, though that seems more and more to me like buying tech stocks in 1999. You could buy bonds issued by a blue-chip company such as Johnson & Johnson (NYSE: JNJ) or Procter & Gamble (NYSE: PG) -- yet that still leaves you exposed to an economic cataclysm.

You could … geez, I don't know what else. There isn't much available that looks like a great long-term investment strategy once you're out of the market. Picassos? Vintage Ferraris? Rental condos in Scottsdale? The Ferrari would be fun, but it's not really a retirement plan.

Of course, when people talk about selling, they're not thinking about an alternative long-term strategy. They're thinking they'll wait for the bottom and then buy back in.

Is that what you're thinking?

You sure that's a good idea? Waiting for the bottom and jumping back in would be market timing. That's the practice of using something -- technical analysis, macroeconomic factors, seasonal indicators, astrology -- to buy when markets are about to rise and sell when they're about to fall.

Market timing, the academics say, doesn't work. But there were academic theories that said our current mess couldn't happen. Are they wrong about this, too?

As Foolish retirement guru Robert Brokamp notes in the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, some timing indicators seem to work more often than not. For example, when dividend yields go up and price-to-earnings ratios go down, prospects for stocks in general have usually been good. No-brainer, eh? But some notions are more nuanced -- for instance, statistically speaking, the stock market does best between November and April.

Ouch. Given how the market's done since last November, let's hope that last one doesn't hold this year. But that makes for a good point -- tendencies and trends and "more often than not" isn't reliable enough to bet your retirement fund on. Consider: Will the next sharp upward spike in the markets be yet another bear-market rally -- or the birth of a new bull? One thing history tells us about bull markets: They start sooner than most folks think they will. We'll only know for sure in retrospect.

Likewise, we'll all know what the bottom was -- a year or two later. But how will you know it when it's here? Can you say for sure that we haven't already seen it? The bottom happens, we all know, at "the point of maximum pessimism." I don’t see very many optimists around today.

Wall Street chest-thumping aside, there's only one good answer to that: I don't know.

So what should you do?

The short answer is to "invest well and hang on." Successfully timing the markets involves an extraordinary combination of luck, skill, knowledge, and more luck -- and even the best market timers regularly miss the mark.

A better answer?

Well, we can't predict the future -- but as Robert notes in his article, there are reasons to believe that the remainder of this bear market will unfold along certain lines. And there are strategies you can use to mitigate downside risk in the meantime -- strategies that don't involve selling everything and sitting in cash.

These aren't esoteric strategies, either -- they're approaches you can use in any portfolio, even a 401(k).

Fool contributor John Rosevear has no position in the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Tyco Electronics is a Motley Fool Inside Value pick. The Fool owns shares of Procter & Gamble.

http://www.fool.com/retirement/general/2009/03/05/its-time-to-sell-and-walk-away.aspx