By all means, buy stocks, but stick to your long-term plan
— -- Q: Should I boost my exposure to stocks since they're so cheap right now?
A: Your bravery is noble.
And you have the basic idea. With stock prices down, and other investors panicking, it's wise to think about buying stocks. As long as the U.S. economy recovers, and it will, you'll probably look back at stocks you bought now and be glad you did.
But, there are a few caveats:
• Don't stray from your asset allocation. If you decided to own 60% stocks and 40% bonds, for instance, you need to stick with that. By all means, if you invest a fresh $100, it's not a bad idea to invest $60 of that in stocks and $40 in bonds, to maintain your asset allocation.
Changing your asset allocation, say to 80% stocks and 20% bonds, just because you sense opportunity may not be a great idea. By increasing your exposure to stocks, you will also increase your risk. And if the market continues to fall, you might not be happy with the results.
• Consider your job security. You might have a pile of cash that you feel comfortable investing now. Assuming that your paychecks keep coming in, you can afford to leave this money invested for many years. But, what if you were to lose your job? Would you need access to this money? If so, you might have a lower capacity for risk than you think.
• Evaluate the risk. While it might be tempting to think because stocks have fallen 50%, you're insulated from further risk. But that's not the case. If stocks were to fall 89%, as they did in the Great Depression, the Dow would bottom at 1529.77. That's an additional loss of 70%.
Now, I'm not saying we're headed into another Depression. And perhaps all the stimulus pumped into the economy will soon kick in. All I'm suggesting is that now, perhaps more than ever, is time to keep your emotions in check. Have an asset allocation plan and stick with it. Being wrong in this market is just too expensive.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
