I had a recent, well not so recent now, request on what to do with a 401k consisting of S&P index funds and GE stock.  Should she move her money to new investments, keep it where it is or go cash.

To be honest, this is a tough call right now.  I do think the market is likely to go down more, as we are in a once in a generation economic tsunami.  Unfortunately, it is impossible to tell how far down it will drop, making it extremely difficult to predict anything with certainty.

GE

I will say that I love GE at the current price and I will be putting an order in tomorrow.  Seriously, an 8% dividend from one of the most diverse companies in the world is spectacular.  I can sit on that 8% dividend for years waiting for the big jump.  There is always the danger they cut the dividend, but they have stated they have won’t and they have plenty of cash right now, so it’s not highly likely they will cut it any time soon.  Even if they do cut the dividend it’s not a big deal.  Let’s say they hammer it down 50%.  This would still give anyone who purchases it now a 4% return, which isn’t a bad historical return.

Of course, all of this does not answer the question, “should a current owner keep GE?”  I’m leaning towards yes, as you have already ridden it down more than 50% if you bought it a year ago.  If you bought it two years ago…..ugghhh.  I feel for you. 

The one thing that current owners and potential owners of GE need to realize is that it is quite possible it goes down further.  Capital spending is slowing and GE gets a big chunk of their earnings from companies improving existing operations (such as airlines buying the Boeing Dreamliner, which has engines made by GE.).   However, there are few places you can earn a good return on your money and still get a good chance for capital gains, with low risk of bankruptcy.

S&P Index Fund

I have huge issues with index funds.  I won’t bore you with them right now, but if you are interested in some reasons not to own index funds here is a decent article The Death of Index Investing.  I will definitely be writing more about why I hate index funds in the future.

Ignoring my dislike of mutual funds let me answer the real question, “should you continue to hold index funds now and wait for the rebound?”  Personally, I would rather be in individual stocks and few well managed mutual funds (such as CGM Focus - huge risk so make sure you know what you are getting into.  Also, this is not a buy and hold fund!!!), but I like risk.  If you have no desire to actively manage your money, then holding your index funds might be the prudent choice if you aren’t going to retire in the next 5-10 years.  It is highly likely you have already seen most of the pain, so selling now and trying to time the market at this point is a fool’s game. 

Ok, here is your answer, well it’s two answers:

• 1. If you know you won’t sell if it drops another 10%, 20%, 30%, etc. then hold.
• 2. If you think you will panic and sell if it drops another 20% then you might want to think about getting out. This is not the best option, but it is better than selling after you lose more.

Above all think for yourself and get help from a fee only financial planner if you aren’t comfortable managing your money.  By the way, none of this advice is for anyone in retirement or within 5-8 years of retirement.