By Jeremy Vohwinkle 64 Comments

I receive a number of emails each week from readers and I try to answer all of them the best I can, but occasionally I get questions from multiple people that ask the same thing. In those situations I like to address the question as a post which can hopefully help others who probably have the same question but just havent asked.

Thats what Im going to do today. Many of the questions in recent months have been some form of:

Im still relatively young and actively saving for retirement primarily in stocks, but the last few years have been rough. Ive lost thousands of dollars and it hurts to see my money continuing to decline or remain flat. Im concerned that the market may never recover and Ive considered taking my money out of the market completely and investing it somewhere safe such as bonds, CDs, or gold. What do you think?

Understand Your True Time Horizon

So, should you get out of the market? Thats the million dollar question, but the answer is usually a resounding: no. For the majority of people writing in they are in their 30s. That means they probably have another thirty years before even thinking about relying on that money, and another few decades beyond that to make it last. That gives us about a 50-year time line to work with, which a lot of people forget about. Think about what can happen over this time span.

Just look back to see where we were about 50 years ago:

• The interstate highways you drive on every day did not exist. Construction on the first highways did not begin until 1956.
• Alaska and Hawaii were not even states until 1959.
• The first domestic jet service didnt start until late 1958.
• Martin Luther King Jr. had a dream in 1963.
• There was no such thing as the Internet or cell phones.
• The introduction of color television was a technological marvel.
• In 1960 the DJIA hit a high of 685. $10,000 invested at that price would be worth nearly $150,000, not including dividends, today.

Put things into perspective and look at how much the world has changed. In fact, just look back ten years when nobody knew what HDTV was, when you were probably surfing the web with a dial-up modem, and using a bulky cell phone with just a one color LED display. And when you go back 40 or 50 years its a shocking reminder how far weve come. So, ask yourself this: if your investments are something that you plan on using many decades from now, is it wise to make a drastic decision today based on just a few short years of bad performance?

Before you do anything, first take a realistic look at when you plan on using those invested funds. While nobody can predict the future, its safe to say that two bad years will likely be just a small blip on the radar over the next 40 or 50 years and making rash decisions without thinking about the future may do more harm than the poor investment performance itself.

Dollar Cost Averaging

Most investors save for retirement by taking a small amount of money and invest it regularly over time. Either through 401(k) contributions or periodic IRA deposits, chances are youre regularly putting money into the market. This is a good thing because  provided you didnt stop making contributions after the market started to fall it means youre investing in stocks even when prices are low. And how do you make money? Thats right. Buying low and selling high.

If youve been continuing to make those regular, periodic investments over the last couple years while the market has declined, you have been getting more shares for your money as you buy low. Granted, the money you already had invested has also gone done and makes your performance look bad, but all of that money youve invested while prices are lower will see even larger gains as the market finally turns around, provided you dont sell them off before they have a chance to do so.

So, before getting the urge to bail out of the market be sure to look at what youve been contributing while the market is down. Its hard to see value right now, but the longer the market stays down and the more money you put into it at those levels, the greater the reward when the market does recover. Think of it this way. Dont you wish you could have invested a bunch of money back in 1995 so you could sell in 2000? Or invest a bunch back in 2003 so you could sell in early 2008? We all do, but since timing the market is risky and nearly impossible to do successfully, the next best thing is to continually invest so you are at least investing some money when the market is down so it can take part in the next bull run.

The Myth About Safe Investments

Finally, to tackle the last part of the question I want to address the myth about safe investments. When people consider bailing out of the market they often talk about moving into something safe such as bonds, CDs, or gold. Theres no such thing as a truly safe investment. FDIC insurance aside, everything carries risk. Its just a different kind of risk compared to market risk.

The biggest misconception people have is that if they get rid of stocks in favor for bonds they are now protecting their money and they cant lose anything. Its true that if you invest in safe bonds or bond funds such as government bonds, theres little chance youre going to lose money over the long run. What you give up for this relative safety is earning potential. Typically, the safer the investment, the lower the returns. So, you may sleep a little easier, but if the market decides to rally after you bailed out to government bonds now run the risk of losing out on those gains. And of course, there are many other bonds and bond funds that dont have the full faith and credit of the U.S. government behind them and it is a very real possibility to lose money betting on bonds. Even if you arent losing your principal, you need to factor in taxes and inflation. In the end, bonds will often do little more than keep pace with inflation over the long run. The risk with that is you really didnt allow your money to grow and now you could be faced with not having enough money to retire on.

Then you have investments like commodities. Gold in particular. TV commercials would lead you to believe gold is as good as it gets. Its a real asset, its an inflation hedge, and since its at record high prices its the best time to be investing in this sure thing. Well, deciding whether you should be investing in gold or not is up to you, but its far riskier than you might think. While having some commodities like gold in your portfolio can be good for the sake of diversification, it is in no way a single safer alternative to the stock market. Putting everything you have in gold is about as smart as putting everything into a single companys stock. Things go right and youre significantly rewarded. Things go wrong and youre left with a devastated nest egg.

Since its nearly impossible to time the market or know what the next hot investment will be, the best thing you can do is assess your diversification strategy. Having a proper mix of investments, especially those with low correlation . can go a long way in making sure you minimize your losses in bear markets while still taking advantage of bull markets. Jumping entirely in and out of stocks based on short-term performance is riskier than the market itself and you often end up just selling low and buying high.

Should You Get Out of Stocks or Not?

Finally, the answer to the original question after a long-winded response. Ultimately, there isnt an answer thats right for everyone, but for most people and in most situations, the idea of bailing out of the market completely, especially at this point, is probably a bad idea. Sure, we dont know what is in store for the next few years, how the economy will fare, or what the future holds, but you should take into consideration all of the issues above before making that decision. Look at your true investment time frame, remember the benefits of dollar cost averaging even if you dont see anything positive right now, and remember theres no silver bullet out there.

When you look at the big picture youll probably come to the realization that it isnt the best idea to bail out of the market. You may still make changes to your portfolio, adjust how much youre investing right now, or even change your strategy a bit, but the all or nothing approach of being in or out of stocks isnt typically the right way to think about it.

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My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.