No Crystal Ball Necessary

Tina pulled her money out of her 401(k) during the recession because she freaked out about the market crash. How did Dave know that the market would recover?

QUESTION: Tina on Facebook pulled her money out of her 401(k) during the recession because she freaked out about the market crash. How did Dave know that the market would recover? Dave says he based his predictions on past market performance.

ANSWER: I wasn’t 100% sure, but I didn’t think that the world was coming to an end, and I bet on the future that over a long period of time, investing in good companies in America doing well is a reasonably good bet. I don’t believe the world’s coming to an end. I’m not buying bottled water. I’m not buying generators. I’m not buying gold. I don’t think the dollar’s going to go into hyperinflation. I don’t think the world’s coming to an end. It’s what I know.

I’m getting old, and I’ve seen a whole lot of people predict the end of the world, and they ended before the world did. Everybody seems to think the world’s coming to an end all the time, and this has got to stop. That’s what I knew. I do know if you were not invested in good growth stock mutual funds last year, you missed out on a 10–12% rate of return. The Dow Jones Industrial average returned 11% in one year. You didn’t hear that on the news, because it’s not bad news. As soon as there’s good news in an area, they quit reporting that area and start reporting on something else.

The point is that you can’t depend on the news to set your investing tone. That’s why you freaked out—because you were watching the news. I don’t think you ought to invest in a 401(k) or Roth IRA or good growth stock mutual funds unless you’re going to have a strong enough backbone to ride the rollercoaster down and up. That’s what rollercoasters do. Sometimes, it’s a really steep, quick drop, and it’s very scary. Sometimes, it’s a gentle drop and it’s kind of just fun. But no one gets hurt on a rollercoaster except those who jump off. Now you’ve lost a bunch of money because of your freak-out. You need to learn enough from your freak-out and grow enough scar tissue around your freak-out so that the next time it happens, you don’t freak out. If you’re willing to stay in the market through the ups and the downs, it’s the only way you should be investing in the market. You shouldn’t invest in the market just because you think it’s always going to go up. That’s a bad plan.