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I never recommend getting out of the stock market entirely--or even making major changes to your allocation to stocks. The stock market is so unpredictable that if you bail out, the risk is very high that you will miss a significant upturn. Moreover, even if you make the right call to get out of the market, you then have to muster the courage to get back in. For example, I have a couple of friends who are very proud of the fact that they got out of stocks before the market crash in October 1987. The problem is that they’ve never gotten back into stocks and they’ve missed out on the huge run since then--the S&P 500 is currently nearly 400% from its pre-crash 1987 high. I strongly believe that the only way to participate in the long-term gains that stocks provide is to put as much money in the market as you can while still being able to sleep at night, and then leave it there.
Moreover, it is important to note that bonds are not as safe as they seem, especially right now. If interest rates go up--and they can’t go much further down--bond values will fall. And depending on the type of bond, the value could fall a lot. I’m not saying you shouldn’t own any bonds. I believe every investor should hold a mix of stock and bonds--and other assets--that is appropriate for their risk tolerance and their long- and short-term financial needs.
(Question submitted by Marvin S.)