Why Jim Cramer Thinks You Shouldn’t Be in Stocks

by Kevin on October 7, 2008

One of MSNBC’s shocking headlines from yesterday, “Jim Crame: Time to get out of stocks“, certaintly got my attention. The tag line of “Financial guru warns that investments could lose 20 percent of their value” definitely makes me want to read on.

As it turns out, Cramer is exactly right… but not in the way the headline leads you to believe.

Sensational Headline, Solid Advice

The headline is over the top to say the least. It doesn’t tell the full story even though Cramer goes on to explain himself further. I suppose the media needs you to click on the article so they earn more for advertising.

Let’s read the second paragraph from the top together:

In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.

Okay… now what has he really said? If you need your investments within five years, you shouldn’t be in the market at all. That’s a bit over the top, but is pretty much on the money.

Short Investment Horizon = Less Equity Exposure

Let’s assume you are 60 years old and plan to retire at 65. You should have a much smaller equity (stocks) stake than someone that is 25 and has 30+ years to retirement. It’s a simple risk question. A 100% equity stake is very risky as pointed out by the currnet market conditions. The S&P 500 has lost 33% of its value since the high in October 2007.

If you have 100% of your money in stocks, you’ve likely lost 33% of your portfolio. Ouch.

Realistically, if you are 60 and follow the 120 minus your age idea, you would have a 60% equity stake. You still took it on the chin over the last year, but not as bad as everyone else. If you are 25, you should have a 95% equity stake and have really felt the pain of the down market.

Equities Provide Growth, Usually

The reason to hold equities in your portfolio is that over time, they have higher returns than safer investments like bonds and certificates of deposit. So while you may still have a 60% equity position that has gone down over the last year… it should, over time, provide the growth to allow your portfolio to continue to grow in retirement. Bonds won’t do that (at least historically they haven’t).

Let’s be honest. It really sucks to see the value of your retirement accounts go down… then down some more… then down some more. But that is the trade off between risk and reward. There are bound to be down markets. Over time you should come out ahead with a larger equity position if you have a long time horizon to retirement.

So Cramer is Right

He is correct to say that if you need your investment money back within 5 years, you’re taking a significant risk. But you would be taking a significant risk regardless of the market conditions. This market just makes it seem that much worse.

For those of you who read this that are in your 20s and 30s… or heck even in your 40s… stick to your investment plan and continue to put money into stocks. Look at it as if stocks are on sale. You’ve got 30 years for the values to recover, even if they go down another 10% over the next year.

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{ 9 comments }

YoungMoneyTalks October 7, 2008 at 11:09 am

I’m really glad you brought this up. He was back on the Today Show this morning to respond to allegations that his warnings the previous day actually caused yesterday’s dramatic drop, which is, of course, preposterous.

And you’re totally right, as much as it hurts to watch your retirement account dwindle at the moment, it’s worth staying in for the long haul. But if you need your money within five years, it’s just common sense to reallocate your investments to lower risk ones. That’s always been the rule of thumb!

philip October 7, 2008 at 11:27 am

I actually saw this on the news when he said it, immediatly I thought “Oh crap, the market is going to take a hit today!” Sure enough, sensational headlines will create some market changes. Just recently i remember there being a headline that was mis-dated for apple or someone making a 30% drop in their stocks, just one article!

I still think that the markets are coming back to where they should have risen to, maybe going a little past but then will be a nice spot for me to start my investment timeline from.

I keep hearing some other employees talking about what they should do, and quite a few have moved their money from the stocks to money market and this is probably good for some of the ones about to retire.

Brian October 7, 2008 at 7:41 pm

He made a big mistake. Yeah the markets are not stable right now, but the future is bright its just going to take time. There are still plenty of things the federal government can do to help the situation. Buy Low and wait to see the benefits in 15 years.

Philip October 7, 2008 at 8:31 pm

@Brian, His comment was for people looking for short term gains that they should not be in stocks, like Kevin said this is something that has been said over and over again. He clearly stated that people looking at minimum of decade should continue in the stock market as they have, continue contributing as they have been. Like Kevin pointed out, the headline that the media displays can cause just as hard of a gut reaction as the actual statements of Jim Cramer.

So is he wrong for saying the same thing I see when I check my vanguard accounts? Would YOU recommend that people wanting money right back out to put their money in the market right now?

Paige October 7, 2008 at 8:36 pm

Well, just as every other stock market crash, this time too “experts” are advocating selling when the market was low and they were advocating when the market was high.

I feel very strongly about it and really its all a whole load of crap. This is the best time to buy stocks. That is the fundamental rule of any stock market crash. You buy good fundamentally strong stocks when the market has crashed and only then will you make money. Anyone who has been long enough in the market knows that you should sell when everyone buys and buy when everyone sells.

This is the time when everyone is selling.

Kevin October 8, 2008 at 9:19 pm

@YoungMoney: Exactly. It isn’t really “news”… it’s a common portfolio risk management idea.

@Philip: I think we still have a way to go before it bottoms off. I’ve heard estimates of Q4 2009 / Q1 2010 before we start to see an economic recovery. Good news is that means stocks will remain cheap for the time being. Any way you cut it, 30 years from now those same stocks should be worth much, much more. We have time.

@Brian: The issue isn’t whether it can be fixed right now. It’s all about perception. Look at today, massive worldwide fed rate cuts — and the market is down 1-2%. But you are right, with a long enough time period things should recover.

@Paige: The headline makes it seem like he is saying sell, sell, sell. From a risk management stance, if you are retiring today… you need to get out of stocks… or at least a majority into safer investments.

Russell October 9, 2008 at 11:16 am

Once in awhile I watch Mad Money, particularly this past few weeks, Jim Cramer is nutty but quite entertaining. (Which is why they have him in the Today show, which is an entertainment show.) He’s had his prediction of Dow Jones average reaching 8,300 for quite awhile, and so far he’s on course to get it. He claims he analyzed the potential low for each of the 30 stocks individually to come up with that target for the DJIA.

He said take the portion of your money that you’ll need within 5 years into safer investments, that seems like fair advice. You probably should have done that before today, though. (Wouldn’t you feel good if you’d done it a year ago.) A few weeks ago Cramer advised rank your stocks from 1 to 4 based on your criteria for potential, and sell enough #4s (lowest) until you’ve put 20% of your investments into cash.

These stock values don’t reflect the ownership of companies right now. John Bogle of Vanguard was on CNBC a couple weeks ago, he asked if anyone actually believed the value of these companies went down $1 trillion one day, then went up $1 trillion the next. Of course not, we’re still suffering through stock market shenanigans, somehow the trading has gotten divorced from what the stocks represent. It should come back into line although as Kevin says it’s going to be awhile.

Paige and Kevin, regarding “retiring today”, you still are going to have investments you won’t redeem for 5 years. I’ve been doing a re-allocation this year with that realization in mind. For some of my Rollover IRA I’m using different target funds (for example Vanguard 2020 and Vanguard 2025) with the idea in mind that some of my investments are going to stay put until I’m several years into retirement.

Kevin October 9, 2008 at 7:32 pm

@Russell: Once again looks like Cramer is spot on. He does have an entertainment show — but when you can get him on an actual news show his intelligence comes out. (It just doesn’t sell advertising, apparently.)

You are also spot on about the value of companies going up and down that much. The issue right now is fear, and the fact that no one knows how much the banks are tied up into this whole credit issue. The liquidity crunch can affect everything from companies making payroll, to banks loaning to small businesses, to banks lending to each other…

philip October 10, 2008 at 8:38 am

Well… we just blew right past that 8300 that cramer said the dow was worth based on individual stock assesment that he did.

Now what is he going to say is the true low for the market?

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