Early in October, investor's fears escalated into panicked selling of U.S. stock mutual funds.  During the month of September, the sale of stock mutual funds was the second largest in history and the largest since July 2002. I expect that October will beat September's numbers.

 

 
What does this mean?  Many investors are selling their funds under the impression that this decline in the stock market is without precedent and their funds will go to zero.  As disturbing as this is, it has happened before. In 1987, the market declined -27% in 7 days.  I was there.  History seldom repeats exactly.  However, you can count on human nature to replicate the past. Just as many people sold out their stock funds in 1987 and regretted the decision for the next 13 years, human nature is forcing investors to make the same mistake in 2008.
 
Where is the silver-lining?  As of October 10th, a measure of the intrinsic value of the stock market suggests that the S&P 500 is "undervalued".  The facts are that when this measure reaches these undervalued levels, the stock market has produced a compounded annual return of 15.7% over three years, and 15.1% over ten years according to Leuthold-Weeden research.
 
A 15% compounded return doubles money every 4.8 years. I am not predicting this performance for the S&P 500.  However, using history as a guide, it suggests that the current value of your stock market investments could double over the next 5-6 years. Indeed, from 1987 to 1992, I witnessed the S&P 500 rise from a value of 224 in 1987 to 425 in 1992.  By the end of 1993, the index had eclipsed 470. 
 
Conclusion: Assuming you are not going to spend your stock market money in the next five years, do not sell. If you have money with over a five year investment horizon, buy.  If you have an asset allocation plan, rebalance.  If you have no plan, call us.