Two months into the Corona event and we find the Dow off about 17% at the time of this writing, up from a recent low of down 39%. Some investors might be delighted if their balances just got back to even having not had any stops in their stock positions.
Stops are sell points where a person essentially sells some of their stocks as markets fall. Not practiced by many investors or advisors, predetermined sell points go against the belief that the market always goes up over the long term is the only strategy one needs.
Although buy and hold diehards may be convinced they will never sway from the strategy, during extreme market sell offs, all conviction can go out the window as life savings evaporate daily down the black hole of plunging markets.
Watching day after day a sea of red ink in your balances can be excruciating and probably won’t do much for your overall mental or physical health either.
Indeed, more than one heart attack, suicide, divorce or other unpleasant negative outcome has resulted from such severe market crashes such as the one we just witnessed. Although the Dow Jones Industrial Average dropped almost 40% in March, there have been worse corrections. 1929 saw an S&P correction of 86%.
Can you imagine?
To address the hand-wringing phone calls to advisors as lifesavings evaporate, the money management trade could be said to have a great answer for all ills.
Actually its two answers, both might be said put a win-win spin scenario on an otherwise grim reality. The spin may be related to the client in two parts, at two different times, depending on an up or down market environment.
Put simply, in up markets the advisor is thought to be a genius and takes the credit for soaring balances. In down markets, the buy and hold advisor blames it on the market saying “well your balances are down because of the stock market.”
Like I said, it’s a win-win for the paid money manager.
I am not a fan of buy and hold. Imagine for a moment if a predetermined sell point or multiple sell points had been exercised while the market fell. The resulting dry powder could be picking up stocks on sale at much lower levels.
It’s possible not only had losses been prevented, but the resulting shopping spree from having cash with markets down 40% could mean substantial profits if markets rebounded. Compare that to the reality of waiting for the markets to recover so one could get back to even.
How do predetermined sell points work?
One only has to envision money management while playing the slots at a favorite casino. A simple narrative can allow almost anyone to envision a stop loss strategy.
When someone decides to throw money at a slot machine, almost everyone (except those with a severe gambling addiction) arrives at a point where they stop gambling and walk away. Whether it be a predetermined set point of losing $20 or $100, or just getting tired of pulling bills out of one’s wallet, they eventually leave the table.
In other words, they say enough is enough and leave. What they don’t do is practice what they may be practicing when handling their life savings.
That narrative goes something like this:
Day one of a crash: “you’re not down far enough, don’t worry about it”
Day two: “you’re not down far enough, don’t worry about it”
Day three: “you’re not down far enough, don’t worry about it”
Day 10: “you’re down too far now, you don’t want to sell out now”
See the problem?
Imagine using that strategy at your local casino. You could end up broke with continued trips to the ATM until your entire life savings disappears down the proverbial slot.
In a nutshell, most people practice proper money management when gambling yet do something entirely different with their retirement plans.
Sure some of you out there might be saying the market always comes back.
I would say, never say never.
What if someday it doesn’t?
Or takes decades to do so?
Hold for the long term?
That depends on how much long you have left in your term now doesn’t it?
This article expresses the opinions of Marc Cuniberti and should not be construed as individual investment advice. No one can predict market movements. Investing involves risk. You can lose money. Stops do not guarantee against losses. Mr. Cuniberti is an investment advisor representative through Cambridge Investor Advisors Inc. a registered investment advisor.