Time to Sell Everthing -- Or Buy More?

While I was away over the weekend, the greatest financial convulsion of our lifetime continued, with markets gyrating, century-old firms disappearing, others changing into fundamentally different companies, and the government buying up the biggest allegedly private companies in the country. As if that wasn't enough, Treasury Secretary Paulson has now suggested the greatest government bailout in history -- one that will make the 1980s S&L bailout look like chicken feed.

What's an individual investor to do? Last week, at the exact market trough, I moved some cash into my index fund (just a law professor amount, of course, not a financial wizard amount) -- I'd been meaning to do that for a while and this seemed like an opportunity. It went up 7% in the next two days. Brilliant. But not so brilliant if the crash is coming.

Now I am torn between conflicting impulses:

1. Sell Everything. When I see that the Republicans think that we haven't had enough government intervention -- after we've already had the biggest government intervention in a generation -- and now we need to have the taxpayers kick in $700 billion, what I see is that they think we're in big, big trouble. Secretary Paulson, who I at least hope knows a whole lot more about this stuff than I do, thinks we're really teetering on the brink. The whole thing could collapse. And remember, our fate is now in the hands of a bunch of politicians who are mostly lawyers and who have no clue about finance. It doesn't look good. If you lived through the '87 crash (I wasn't in the market in those days), you know that your portfolio can lose 22% in a single day. Of course that means that if you sold everything the day before and bought back the day after, you'd effectively have gained 22% in a single day. So maybe this is the time to sell everything. Get out of the market, the crash is coming.

2. Buy More. On the other hand, maybe this is the big opportunity to stay in. If this bailout plan goes through, it'll be the biggest taxpayer giveaway ever. Sure, the taxpayers will allegedly just be buying up questionable paper at its heavily discounted market value, but you know they'll actually end up paying far too much. Wall Street is going to have its greatest party ever and we're paying the bill. Maybe that's the whole point. Maybe what's really happening is that the Bush Administration sees this as its last, great opportunity to steal the taxpayers blind and shovel huge piles of money at its stockbroker friends. Maybe it's the financial equivalent of the Iraq war buildup -- selling the country a bucket of nonsense based on complete lies. It's certainly going to be the financial equivalent of the Iraq war in terms of the price tag. Even if there's no lying involved, it's still a big financial boost for rich stockbrokers at taxpayer expense. Your portfolio is your chance to get your small piece of the action. Buy more.

Not so easy to know what to do. I'm a buy-and-hold investor -- I hardly ever sell anything. I'm still young enough that I can weather most storms over time. So I'm unlikely to go with the first stragety, even though this might be the biggest storm of our lives. But this could really be the time for a bold, unusual decision.

One thing's for certain -- don't take your financial advice from law professors.