Three Reasons Not to Sell Indiscriminately

It’s hard not to feel the fear in this market.

I know … I feel it too.

Personally, I’m balancing the desire to sell everything and run for the hills against the knowledge that doing so would be the worst possible statistical choice to make right now.

Which means, as it usually does when I get such conflicting emotions, is that the real issue is simply not doing something stupid.

So let’s talk about that for a minute.

First, you’re probably hearing the same talk that I am about why you should stay invested … yada, yada, yada … don’t miss the upturns … blah, blah, blah.

Dismiss most of it. If you’re nervous about the markets, there’s no reason in the world you need to be fully invested. Staying invested is something Wall Street cooked up to keep its claws on your assets. Given present events, it makes all the sense in the world to put a solid portion of your money in cash – or in short-term Treasuries – as we’ve advocated for months now.

But don’t sell your holdings indiscriminately. Use trailing stops to let the market tell you how and when to make your move. Ideally, the key to the current situation is finding a way to get through this mess without sacrificing every bit of upside.

Recognize, however, that the market may “tell” you to sell everything before this is over.

When I said eight months ago, before it became de rigueur and dawned on the Ministry of Whitewash, that this was the worst financial crisis since the Great Depression, I wasn’t kidding. And I’m not kidding around now. And here are three reasons why …

• First, despite the financial shellacking we’ve taken in recent weeks, we have still not seen the true hair-on-fire, I-want-out-at any cost panic – at least, not yet.

• Second, “hope” is not a viable investment strategy, even though many investors continue to hang onto that emotion. At the same time, “giving up” is not such a hot strategy, either, especially if you’ve done your homework and understand exactly what’s worked in past periods of market turmoil. Right now, the list of “what’s worked” includes a healthy dose of income-oriented investments, hard assets and even plain-old-vanilla balanced funds – all of which have been proven to stabilize your portfolio during turbulent times in the past.

• Third, remember that the doom doctors that seem to have all the headlines right now make headlines precisely because they’re so extreme. And don’t forget that certain trends – like the growth in Asia, energy, and inflation for example – haven’t disappeared. They’ve still got trillions of dollars behind them and are still virtually unstoppable; they’ve just been pushed from the front page in recent weeks. So prepare a shopping list and get ready. There’s a lot more value and upside than most people think – just not yet.

In the meantime, make sure that fear strikes out – and not you. Just play it smart.

Original post

Comments

[TinyMIghty:]

The fear is the emotion created by the people who do not know what they are doing. I am also sorry for the people who are still in the market to believe that the buy and hold strategies and modern portfolio theories work under this environment. The U.S. market dropped down about 40 percent in average from October 2007 high.

2008 Oct 12 09:02 PM

[a believer:]

Good article, thanks.

There is a bigger difference between cash and stock value than most investors are willing to admit. Stock value is merely a collective confidence, whereas cash is a comparatively stable medium of exchange. Not only that, but the 'collective confidence' that creates stock value has evaporated recently as investors found out they have been lied to or severely misled by multiple large companies in the Leveraged Debt Industry (hence, the multiple bankrupcies and many more to come). Obviously, 'collective confidence' can evaporate before most investors can react, therefore a buy and hold strategy is MUCH more risky than brokerages let on.

That's why cash (and adding to it, SAVING it as you work hard at your REAL JOB) has so much more value. It should seriously be considered as a premium investment vehicle. Instead, it is much-maligned, normally by those who stand to profit from commissions and 'advice,' i.e., the entire financial services industry.

As painful as it is to many, I believe this market crash is one of the best things that can happen to our country right now, and was absolutely necessary. It has destroyed the Leveraged Debt Industry, and a whole army of foolish dreamers will be forced to find REAL WORK.

I took a shellacking in the 85% drop in the NAS 100 that occurred in 2000-2001, my first real financial bubble-pop. However, I did not have a trailing stop strategy then. I'm not sure such a strategy would have worked, nor do I think such a strategy can be profitable in the stock market. All of my liquid assets were in cash as of October 2007. I do not see any reason to get back into stocks. We are only down about 45% and will probably drop much lower. I don't see that the 'collective confidence' has returned, I only see that it will get worse.

Getting back in now would be a risky attempt at bottom-picking, it would NOT be following a trailing stop strategy, which likely would not be profitable anyway. Futures research has shown that trailing stop based systems don't normally work long-term in ultra-choppy markets like DJIA because black-swan events occur in these markets that a system cannot be designed to profit from. Choppy markets destroy the profitability of trailing stop based systems, and the stock market is the choppiest of all markets.

The next support level is about 1000 DJIA points lower than here. No-one knows for sure, but my odds say that we'll get there before coming back up for some air...

2008 Oct 12 11:21 PM

[punk_ash:]

I just do not understand how people can be fully vested in equities. I have never been more than 50% in equities, some cash to sleep in the night and some commodities. The whole equity culture is vanishing from the world and the reason is that all the money than these companies make goes to fund the life styles of the CEOs, and that is what we have these rich valuations. The P/E need not be more than 10 even for a growth company and then the people will not get screwed. Easy money is partly responsible for this problem if you ask me...

2008 Oct 14 04:18 AM