Should I cash out my 401(k) — or hang on?

John W. Schoen Senior producer • Profile • E-mail

The discussion about retirement this week over on Newsvine drew a number of variations on the same theme. What should I do with my 401(k) account now? Sell my stocks at a loss? Or hold on and hope the market comes back?

Should I wait to rebalance my 401(k), and weight it away from stocks? Should I wait for things to get back to where they were, while still putting contributions into the current plan? Or should I put everything into bonds right away? My portfolio IRA and 401(k) has lost 40 percent of its value.
— Alf-734368

As with many questions about personal finance, there are no absolutes. That's why they call it “personal” finance.

In any market, the answer depends heavily on how long you have before you expect to retire. (Or hope to, at least.) The closer you are to needing the money — for retirement, college tuition or the down payment on a house — the greater your risk of holding stocks.

That's why, when it comes to investing for retirement, two people holding the same stocks are exposed to very different levels of risk. I'm 56, my son is 20. His risk is a lot lower than mine because the odds of making money in stocks are much better for someone with a 45-year time horizon than for someone like me with only 10 years left before I may need the money to live on.

But this is not just any market. It's true that if you cash out stocks now, you risk missing the market rebound. Investors who sold into the 1987 stock market crash learned that lesson the hard way. But if you go back a little further in history, the recovery from some financial panics took a lot longer. When the stock market sold off during the Great Depression, it didn't return to its 1929 peak until the mid-1950s. There was plenty of time to “get back in.”

So the decision to stay in stocks rests heavily on whether you think this is a "V-shaped" pullback or whether we're in for a longer, more gradual recovery. That's impossible to predict. But it’s also hard to come up with a scenario that would provide overnight relief for the widespread problems facing the global economy and financial markets. There’s a significant risk that we haven't heard the worst of the bad news yet.

The central question is whether stocks are priced correctly at current levels or whether they've been wildly oversold. To answer that, you have to know how well the company whose stock you own will weather the ongoing financial storm. Some companies — especially those with lots of cash on their balance sheets and products people will need no matter what happens — may come out of this much stronger. Those stocks have already held up relatively well because people who want to stay in the market have moved money into these safer harbors.

Lastly, since no one can predict where markets are headed, you have to consider how much market volatility you can take. For some investors, it's better to realize losses now, get a good night’s sleep and regroup. Take a look at what's left, figure out where that leaves you and see what it will take to get your plan back on track. If the market comes back to life, you can always get in later. If the market heads lower, you've stopped the bleeding.

So, if you have a lot of time, you may want to ride this out. But, with apologies to the Coen brothers, this is No Market for Old Men.

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