Many Bought Shares High, Sold Low

by Mary Pilon

As stock markets slid in March, Judy Brady lay awake at night thinking about her portfolio.

"My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going," she said. "I thought: I can't afford to lose all this."

So the 70-year-old retiree in Schaumburg, Ill., sold most of her stocks. Instead of the 40% of her portfolio that was in stocks, now she has just 10%. The rest is in cash, bonds and federally insured certificates of deposit.

The Dow Jones Industrial Average hit a bottom at 6547.05 on March 9, a 12-year low and less than half its October 2007 level. Many investors like Ms. Brady cut their losses. Some $70 billion flowed out of stock mutual funds or exchange-traded funds in February and March, according to TrimTabs Research.

Since bottoming out, the Dow has surged 26%. That means investors who sold at the bottom have missed out on one of the most powerful rallies in decades. "Their timing was almost perfectly bad," said Dennis Houlihan, a Fort Wayne, Ind., financial adviser who tried unsuccessfully to steer three of his clients away from selling in early March.

Mr. Houlihan said he hasn't heard from any clients who dumped stocks. "There's a tail between the legs. You don't want to rub their nose in it," he said.

Some investors said they had no choice but to bail out when stocks were sinking. Josh Caucutt of Lakewood, Colo., cashed out his individual retirement account in early March to help pay the $1,200-a-month maintenance costs on his unsold home in Wisconsin. The IRA, valued at $3,000 a year ago, was divided evenly between a stock-index fund and funds that blended stocks, bonds and other investments. When he cashed it out, it was valued at $1,800, a 40% slide.

"I knew exactly what I was doing," said the 34-year-old father of three. "By no means am I convinced I did the right thing. But we needed this money immediately. And there wasn't much to indicate that things were going to change."

Jesse Archambeault of West Hartford, Conn., worried he would lose his children's college money if he didn't get out of the market. Mr. Archambeault got $100,000 from selling his previous Connecticut house in 2007.

But when the $100,000 turned into $60,000 late last year, Mr. Archambeault and his wife went in to see their financial adviser, Rick Shapiro. Mr. Shapiro told them about his "two-Ambien" test, referring to the sleeping pill.

"If two Ambien can allow you to sleep," Mr. Shapiro said, "then it still might make sense to stay invested."

The Archambeaults passed Mr. Shapiro's test. They sold anyway, reducing their stock holdings to 20% from 85%. They sold in November, which hasn't hurt them since the market is now roughly flat for 2009.

Still, Mr. Archambeault said it is tough to watch the rally pass him by. He is thinking of putting half the money back into the stock market in coming months.

Financial advisers said they usually discourage clients from tugging money out of the stock market during downturns. They know that buying high and selling low is a formula for awful returns. But panicked clients often want safety now.

Lucas Hail, an adviser in Cincinnati, said two of his clients sold close to the market bottom. They waited until the market recovered a bit and recently bought back in.

"They know that in hindsight, it wasn't the best thing to do," Mr. Hail said. "But it was what they had to do emotionally. Math and the mind don't always add up."

Not everybody who sold earlier this year considers it a mistake. Holly Hunter, a financial adviser in Portsmouth, N.H., advised many of her clients to sell, first in the summer of 2007, then again in February of this year.

"My folks need income," she said. "They need to know they can pay their bills....There is no waiting time for things to come back around."

Ms. Hunter estimates that two-thirds of her 80 clients are retirees. She met with clients individually to determine how much of their portfolios should be scaled back. A few years ago, it wasn't unusual for those portfolios to be 60% in stocks, she said. Now, many older clients have scaled back to 20% or less.

Only two have since questioned whether selling was the right move. "The downside would have been horrific," she said. "What if we were at 3000 now? Selling at 6500 would have been brilliant. And you don't know that at the time of the decision."

Ms. Brady, the Illinois retiree, has no regrets about selling near the bottom. The stock market is a popular topic of conversation in her art classes at the local senior center, and when she sees the market going up, she sometimes wonders about the gains she is missing out on. Her account is about half of its value at the start of 2008.

"I wasn't comfortable," Ms. Brady said. "It's not just about money."


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