Sell Now or Ride Out the Storm?

July 26, 2007 — -- Following the stock market's second-biggest nosedive of the year, in which the Dow Jones industrial average fell 311 points Thursday, investors everywhere were getting nervous and wondering whether they should sell now or wait out the storm.

Hugh Johnson from Johnson Illington Advisors answered the pressing questions every investor is asking.

Should I sell now and limit losses?

No. The one mistake you make as an individual investor is getting caught up in the day-to-day and hour-to-hour swings in the stock market. That's noise and it doesn't count. It's important to recognize the underlying trend, and they're still positive. But don't get caught up in the emotional signs of the market, because you will make mistakes. You will buy when the market is going up too high and you'll sell when it's going down too sharply, and it's not a good strategy.

Individual investors are often accused of being too emotional or selling when they're afraid, usually at a low price, and buying when they're euphoric, usually at a high price

I'm looking to buy a house, what do I need to know?

You need to know this: Lenders -- those who have financed and mortgage lenders -- are liable to be tougher on individuals borrowing money to buy a house, so you need to be credit worthy. In other words, you have to pass tough bank standards, and that simply means you should make an application to borrow money from the bank but the mortgage terms will not be as generous as they were in 2004 and 2005, when they weren't only generous but also encouraged speculation.

When will we know a major correction is under way? Is there an official percentage?

There is no official percentage, but when the stock market is down 5 to 10 percent, that qualifies as a severe correction. When it's down 15 percent, then it qualifies as a bear market if it lasts for a long period of time.

I'm 35 and feeling the pain. My house is worth less, my portfolio has been great but now I'm worried. What should I do?

You do nothing. If you have a house and you're 35 years old and you're making your mortgage payments, keep on living your life and do nothing. And if you're 35 and you have a portfolio of stocks and mutual funds, keep on adding to that stock portfolio and don't bat an eyelash. And why I'm saying this is because financial market history is replete with crises that cause shocks to the stock market. And each time that occurs, some last a little bit, some last a month or two, some last longer. Even though they occur, we always muddle through.