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As I'm writing this column on August 28, 2007, the stock market indexes are declining significantly.   The Dow is down 280 points, or 2.1% to 13,041 and the S&P 500, and the. Nasdaq and Russell 2000 are falling even more.   When you're online, you can't resist reading the pundits' explanations.   Subprime credit problems spreading.    Housing market worse than feared.   Fed Reserve officials worried about worsening economy.   Markets overseas frightened about American economy.   Then, you turn on television at night and hear proclamations from some experts that it's the right time to sell and from others it's the right time to buy.   I'm urging you to be realistic with yourself.

Let's say you are a person in her forties or fifties, married with children in college, and with a large mortgage on your house.   Your income, along with that of your husband, are good, but you don't seem to be able to save anything beyond the money going into your 401k and 403b plans.   Or let's imagine a similar situation for another couple except the children are out of college, becoming financially independent, but one spouse's financial situation is very tenuous.   His business (or his job) is in an industry undergoing a lot of change and it looks like income will fall in the near future, and it may take years to recover.  

Should these people be invested in the stock market?   I say no, unless they can demonstrate all of the following three things; (1) that they understand that investments in the stock market can decline very significantly over long periods of time and (2) that they may need to sell these investments to raise money to cover expenses and (3) that they are sure that they will be able to emotionally handle large and/or long erosions in their investments.   As a financial advisor for over 30 years, I have found the large majority of people cannot handle the risk and end up selling during lower periods, and buying back during higher periods, no matter how smart they are.   Furthermore, there is a clear record in history that the equities markets have undergone long protracted bear market cycles.   One example is from 1966 to 1981, as it took 15 years for the S&P to recover its previous high.   If that happened again, many baby boomers hoping to retire in the next few years may find themselves unable to do so.   Worse yet, many retirees already drawing down their investments to cover expenses may find themselves running out of money, forcing them to sell their homes or dramatically curtailing their lifestyle.

It may turn out that the next several months or few years bring about good gains in the stock market, but is it really worth the risk?   Think about this.   It's well known that the average annual return on stocks (or mutual funds of stocks) based on the S&P 500 index is about 10%.    But recent studies show that the actual average annual return by most investors is much less.   Only about 4% or 5% because many investors make poor timing decisions.   Furthermore, if the long-term 10% is an average, and you know there are many big investors and insiders making 20% or more, then what do you think the rest of us make in order for the average to be 10%.   Finally, is a possible long-term 10% worth jeopardizing your financial security?   I don't doubt that volatile non-guaranteed investments are suitable in many situations for many people.   But probably not for the hypothetical couples I mentioned.   Or for seniors on a fixed-income.   Or for people without adequate life insurance, disability insurance or long-term care insurance.   Or people facing the possible catastrophic effects of a long-term illness. Or small business owners in erratic industries.   Or employees with uncertain futures.   You get my point?    If you feel you must be in the stock market or want to phase-out of it slowly, perhaps you should check out the one-year FDIC insured market-linked certificates of deposit, for which at least your principal, not your earnings, are guaranteed.   Wouldn't that be more realistic for you?

About the author:

Frank Sisco is a CPA and Personal Financial Specialist and writes on topics related to life and money.   You can contact Frank by email at ideasmoney@aol.com or by phone at 914.589.1013 in order to express your opinion about this article or to obtain copies of prior articles.   He resides in New Rochelle, NY with his wife and daughter.