What Am I Supposed to Do Now?

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For shell-shocked investors wondering whether they should dump their stocks now because they need the money, I have only this to say: if you need the money today, you should have sold years ago. That advice holds whether the market is up or down, bullish or bearish. Even though a lot of novice investors claim they are in stocks for the long haul, that often turns out to be nonsense, especially when shares increasingly are being bought on credit. It has been easy to be brave and keep buying during the longest bull market in history. But what if we're in for mediocre stock-market gains for the next 10 years? For some people, drops as steep as last week's are too much to take, physically. I'm a big believer in the sleep-at-night theory. No investment is worth keeping if it robs you of your sleep. If you can't stomach 50% losses in your stock portfolio, get out now and save yourself a heart attack. You may not be able to buy that mansion in Spain, but at least you'll live to see your granddaughter's graduation. Even if you sleep soundly, the prospect of a potentially prolonged bear market begs the most basic investment question: Why do you own the stocks that you do? Now, more than at any other time in the past 10 years, a few simple rules of investing apply.1. If you own stock in a company but don't know what the firm actually does to make a profit, you deserve to be taking a bath if the share price plunges.2. If your company doesn't make money and has no reasonable prospect of doing so soon, sell. Buying things of no intrinsic value is fun with, say, baseball cards. But this is real money we're talking about. Earnings and the way they are paid out to stockholders—through dividends—are the only things that can tell you in the long term whether owning a stock is worthwhile. Why be an owner if you can't share the wealth?For mutual-fund holders, the situation is a little different. You don't need to know what the companies in your fund do. If you did, you might manage your money yourself. For mutual-fund investors, there are a couple of rules to live by. 1. Avoid sector and country funds. You will never lead the pack if you invest in global stock or bond funds, but you'll never finish last, either. As a dabbler at investing, how are you supposed to know whether now is a good time to buy a technology fund but a bad time to sell one investing in Thailand? Those decisions are best left to people who are paid to think about such things all day. 2. Don't pay obscene fees. Unless a fund under the same manager has consistently outperformed its peers for five years, there is no reason to pay expenses of more than 2% a year, or a front-end load of more than 2% to 3%. Anything more just goes into nice vacations for your manager and posh leather sofas in his waiting room. If I want to finance a leather sofa, I'll buy my own.Most importantly, for investors who choose either stocks or mutual funds: if you need the money in the next three to four years, look into buying bonds, either individually or through a mutual fund. Stocks in good businesses that are well run will eventually rise again and outperform bonds, but maybe not as fast as you might need them to.Of course, we're all supposed to know which equities we want to own and why before we buy. But even if you plunged in without being precisely sure why, it's never too late to think about your holdings. Remember, the worst stocks not only keep falling but can approach zero. The biggest losers are those who refuse to jump off what is clearly a sinking ship. They die proud, valiant deaths, but they're dead in the water all the same.Philip Segal is Hong Kong bureau chief of AsiaWise.com