In a recent post, I said that in order to get out of a hole, you need to stop digging first. My solution, although admittedly not a perfect one, was for those who held on to losing positions to sell 50% and put a 5% sell stop under the balance.
An opposing view was featured in MarketWatch titled “The high price of panic.” Here are some highlights:
If you didn’t see the market’s meltdown coming, you have plenty of company. If you’re selling now, it’s probably too late.
It’s not that stocks can’t fall further. You can bet that patience and resolve will be tested time and again before this bear goes into hibernation.
We haven’t seen the complete capitulation and outright despondency that historically marks a bottom. Not yet. Main Street consumer confidence is at a 40-year low, but Wall Street still has too many optimists. A return to early October’s dramatic lows may change their minds.
But for a longer-term, retirement-focused shareholder — and that’s most of us — selling stocks just because they could fall further not only locks in losses, but also makes it less likely that you’ll participate in powerful market rallies.
Missing those days can be hazardous to your wealth.
Sure, the market always seems to make a bottom right after you finally break down and sell all of your holdings. However, this can be a two-edged sword. If you’re down already 40% for the year, my belief is that it is better to lighten the investment load by 50%, unless you can convince yourself that another 20% drop won’t bother you, if it happens.
Nobody has the answer as to the duration and severity of this bear market. However, if I were a buy-and-hold investor, I’d personally prefer to err on the side of caution rather than seeing my already sharply reduced portfolio take another hit; even if that means participating with only 50% if the markets rally from here.
While I strictly follow technical indicators for my trend tracking decision making process, this might be a good time to look at general fundamentals as well. Just about all economic indicators are pointing south confirming my belief that there is more to come on the downside although wild swings to the upside may very well temporarily cloud that picture.
Comments 2
Here is my idea of a balanced portfolio. I got out of almost all stocks after losing 15% (which I should have limited to a lesser loss).
I have now done some bottom fishing and have about 1% of my portfolio in SPY.
But until the trend really begins to show a reversal of the bear market, I’ll stand aside for the most part.
A lot of investors would gladly trade teir losses for your fairly minor 15%.
Ulli…