by Archie M. Richards, Jr., CFP^®
June 24, 2002

"We're worried about so many uncertainties that didn't exist before September 11," write Tom and Nancy.

"In October 2000, almost a year before September 11, we bought the following Vanguard mutual funds:

Total Stock Market Index Fund

European Stock Index Fund

Pacific Stock Index Fund

Emerging Markets Stock Index Fund

"Then September 11 happened. If you were in our position, would you hang in there or would you choose other positions?"

I like your choice of funds, Tom and Nancy. The Total Stock Market Index Fund holds about 3,000 U.S. stocks and the other three between them about 1,500 foreign stocks. As the world economy advances smartly over the next decade or two, as I'm sure it will do, your portfolio will grow with it.

In addition to your domestic and foreign stocks, you'd have been better off diversifying to real estate and bonds. While your funds fell, the prices real estate investment trusts and bonds rose.

Over time, I expect the total returns from the four groups to be about the same as the returns from the two groups you now hold. But the up-and-down fluctuations of the whole portfolio will be reduced. When the news is bad, the overall values won't fall as much as you've experienced, and you'll feel less inclined to sell.

I therefore suggest that 20 percent of your portfolio be diverted to the Vanguard REIT (real estate investment trust) Index Fund and another 20 percent to the Vanguard Bond Index Fund. Of the remaining 60 percent, place half in the Total Stock Market Index Fund you hold now and the other half in the three foreign funds you also hold.

Make the changes now. Don't wait until the values of your current funds return to the levels at which you bought them. The market couldn't care less about the past. In investing, the only thing that counts is the future.

Except for the insufficient diversification, the purchases you made in October 2000 were correct. The declines weren't your fault. The market is always unpredictable. The right time to invest in stocks is always when you get the money.

No one can blame you for worrying about the current uncertainties. But remember, there were plenty of uncertainties before September 11. We just didn't know about them.

Now we know. The whole world knows, which makes the uncertainty less, not more.

Terrorists are being arrested all over the world. Their financing is being shut off. Pakistan has been an important source of terrorism, yet it has recently stopped the incursion of terrorists into Kashmir and has begun closing down the schools that train terrorists. Saddam Hussein's days are numbered. In Iran, a pro-American revolution will sweep out the ruling clerics. Many positive changes have occurred, with more to come.

Nuclear weapons - I love 'em! The 40-year cold war between the United States and the Soviet Union would have become a devastating hot war, killing millions, had not the possibility of annihilation caused both parties to keep their guns in their holsters. India and Pakistan are reacting the same way.

Yes, pockets of terrorists remain in America, but they don't possess the technology to kill many people. Any killing is awful, of course, but overall, the terrorists are like gnats on our backs.

The market is not weighting terrorism as heavily as you might think. Israel, for example, has suffered terrorism far worse than we have. Yet its stock market is 15 percent higher than it was in January 1999, before the suicide bombings began.

More likely, the U.S. bear market is caused by domestic economic circumstances, not terrorism. I can't predict those short-term circumstances. No one can do so consistently. The only way to deal with them is to just ride through them.

If you sell and you're wrong, you won't know when to get in again.

If you sell and you're right, you'll think you were brilliant and try more market timing. But the next four times you'll be dead wrong and be left way behind.

Diversify, but don't sell your stocks. Just forget about them for a while.