buy low, sell high

It seems stupid to have to give a disclamer about this post, but I am giving some investment advice. As always, you make your own financial decisions. Even good advice can be improperly followed. I do completely stand behind the principle that this is stellar advice for anyone who is not planning to retire for more than ten years.

This is a post that will probably bore most people, so that is why I saved it for the weekend. I feel that what I have to say is important to note, though, because it could ultimately save some people thousands of dollars, so I decided that I should post it at some time. Also, for those people who understand some of the basics about investing, this will probably not be anything new.

I am taking an investments class right now. More than actually teach me about investments, it has reinforced some beliefs that I already have. You can't analyze a company and just know that it is going to do well based on number crunching. You have to get lucky. You can improve your odds, though, by not going after whatever happens to be ridiculuously popular at the moment, because it is almost certainly extremely overpriced. You cannot find winners by looking at the financials of companies, but you can often eliminate losers.

I do not pretend to know a lot about investing. I have already made my share of mistakes. I have learned from those mistakes, though, and I have observed other people making mistakes, so there are a few things that I do know.

Most people anymore have a defined contribution retirement plan. The good thing about this is that if someone moves around jobs, that person can roll their 401(k) or 403(b) into an IRA and not receive any penalty for not being in a company pension plan for a set number of years. There are a lot more bad things about this, though.

People now have the option of cashing out their retirement plan when they change jobs, which is usually not good at all (though I admit it is sometimes necessary). People are now limited to whatever investment options are available in their retirement plan. People are also now typically responsible for making investment decisions within their plans. My observation is that a lot of people are not equipped to handle this task.

There are a lot of economists who believe that we are currently in a recession. This is possible. The stock market has certainly dropped in the last six months. The last recession I went through I observed some otherwise very intelligent people make unwise moves in their retirement plans. One person in particular told me that after losing so much of the value of his plan due to the market downturn he moved all of his retirement investments from stock funds to bond funds. This may sound like a good move after losing money, but it is essentially the equivalent of selling low and buying high.

This may sound arrogant, but I am about to give you perhaps the most important investment advice you will ever hear. If you are more than ten years from retirement and are contributing to bonds in your retirement account right now stop doing this and invest in stock funds (preferrably index funds). If the stock market goes downhill for an extended period of time, this is the best thing in the world that can happen to someone who has a retirement plan where he or she contributes only to stock funds and plans to not sell the funds any time soon. That person gets to buy the stock funds at a discount every single pay period for the stretch while the market is suffering. It is the equivalent of buying low and selling high.

So to reiterate my advice, it is this. So long as you are not going to retire in the next five or ten years, a recession is not the time to get out of stocks in your retirement plan. It is the time to get in. In the long run your odds are very good for having more money than you otherwise would have had for retirement.