Sunday Musings: To Get Out Of A Hole, Stop Digging

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With the markets having severely destroyed buy-and-hold portfolios over the past four months, I have received many emails from those who stubbornly have held on to positions mainly due to ignorance or in many cases bad advice from you know who.

Many investment advice columnists are now saying that this would not be a good time to sell because of the sharp drop we have experienced. Sure, if you’ve stayed on this bucking bronco with your entire portfolio, you are probably angry and disgusted when reviewing your monthly statements. And you’re right to feel that way.

But the market is at this level whether you like it or not. While everyone is trying to figure out whether we have reached bottom, or are close to it, you probably live on the hope that all is well as soon as the trend turns. And that’s the rub. There is no way of knowing whether any rebound will be the real thing or another head fake.

So, what’s a buy-and-holder to do? First, I hope you learned your lesson but more importantly, besides the losses, it’s the lack of a plan that keeps you in this uncertain position wondering what to do next.

Be aware that there is no perfect solution. You dug yourself a hole, and the first thing you need to do is to stop digging. How? Have a plan how to deal with whatever the market throws at you. If I were in a fully invested position now, or was holding on to some losing mutual funds, here’s what I would do to stop the bleeding:

I would sell 50% of all my positions and put a 5% sell stop under the balance.

As I said, it’s not a perfect plan, but it’s a plan nonetheless. If the markets rally from here, then you will still participate with 50% of your assets. If the bottom drops out, you’ll be glad you sold 50% and only have a 5% risk factor on the balance.

Emotionally, this will give you some means of control over the circus on Wall Street. Think about it for a moment. Having a plan to deal with the vagaries of the market place no matter what happens will put you in charge, which is the way it should be.

And finally, never ever listen to anybody promoting fully diversified buy-and-hold portfolios without the use of any sell discipline. The price for ignorance is simply too high.

Bear market avoidance is something I have written about during the last disaster in 2002 and nothing has changed; except the bear has gotten more vicious this time around and losses for many have already exceeded those of the 2000-2002 period.

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