This article was written by me on October 6, 2011 on my Golden Valley Patch Blog.
Since the early stages of the current stock market decline, I have read a steady stream of articles in the Minnesota financial media stating that company retirement plan investors should “buy stocks when they are cheap.”
As you would expect, this message comes mainly from the mutual fund companies and company retirement plan providers. These are the same investment professionals who always recommend that company retirement plan participants remain 100 percent invested and “buy-and-hold” in the stock market at all times.
For all of their working lives, company retirement plan participants have been told to put every dollar of their company retirement plan account value into the stock market at all times.
That begs the question, When the stock market declines, where is the money supposed to come from in a 401(k) company retirement plan to buy stocks?
If you don’t have money to invest when stocks are “on sale” like they are now, what good is “buy stocks when they are cheap” investment advice?
In May of this year, at the top of the recent stock market cycle, these financial professionals had the same message as they have now. In the financial media, stocks are always “cheap” and “now is the best time to buy.” These “professionals” are always in buy-and-hold investment management mode, no matter what the risk level in the stock market is.
It has been no secret that the economy in the U.S. has been fading. The same can be said of the other major countries around the world. Eventually, the U.S. stocks markets always reflect those economic facts.
There have been more large sellers (supply) of U.S. stocks in the last few weeks than there have been large buyers (demand) of U.S. stocks. If there are more sellers than buyers of anything, the price will fall.
Why in the world would any company retirement plan investor think that a buy-and-hold investment strategy would be a successful during uncertain economic times?
All that a buy-and-hold investment strategy ever guarantees in a company 401(k) plan retirement account it that you will never preserve enough principal in your company retirement plan account in the early stages of a stock market decline.
Consequently, you also then never have a significant money market balance in your company retirement plan account in order to “buy stocks when they are cheap.”
You can’t have it both ways. Common sense applies in the investment world, too.
“Buy stocks when they are cheap,” never has been, and never will be, part of a successful long-term investment strategy. The unfortunate thing for 401(k) plan participants is that stocks can always get cheaper, and your company retirement plan account can go down much more in value.
Ric Lager
Lager & Company, Inc
