Marc Cuniberti With most of the government stimulus programs ending and the Delta variant running rampant through the population, personal incomes are starting to drop, confirmed by news media Morning Consult, that finds that Americans are already feeling an income pinch as businesses react to the new highly contagious form of the virus.
Those realities are starting to bite Wall Street and the stock market seems to be on a path to lower levels. Although no one can say for sure which way markets will go, CNBC reports many popular stocks are down in more than the 20%.
In my experience, most advisors just tell their clients to hold on because the “market always comes back”. Not only is saying that technically illegal for a licensed advisor (we cannot guarantee any market direction whatsoever), markets may “always come back” until they don’t.
Readers of Money Matters know I am not a fan of buy and hold. The reasons are many. “Hold for the long term” doesn’t float my boat because I don’t know how much long I have left in my term, and neither does anyone else.
Secondly, a market crash can be extremely stressful on the psyche and a body of an investor when it occurs. Even if markets do come back, experiencing a 38% drop like the one that occurred in the Dow in March of 2020 is gut wrenching.
Selling on the way down, if one manages to accomplish that, means that if markets continue down, dry powder in the form of cash will be available to buy stocks at much lower levels.
Who doesn’t like a sale?
Finally, famous investor Warren Buffett has two rules:
- Don’t lose money
- Don’t forget rule one
How one adheres to those rules means hitting the sell button from time to time.
How does an investor know when the right time arrives to eject all or part of their holdings?
Basing that decision on where the market is cannot be accomplished with any sort of guarantee. Remember that no one can say when a crash will occur or end. Instead of basing a sell orders on where the market is, investors can base their decision on where their portfolio is.
This means, like leaving a casino when you have lost a certain amount of money, investors can decide a point where enough is enough and leave the “casino of Wall Street” when they find their portfolio has eroded to a certain point. This might mean down a certain percentage off its high, or selling off stocks one by one if they fall by a predetermined amount.
I usually base my sell points on two criteria:
- When a stock falls by a certain percentage
- When the portfolio is off a certain percentage from its high
What these percentages or levels are depends on how much we hold of the security, what kind of asset class is it (bonds, stocks or asset sector), the stocks inherent volatility (how much does it usually move compared to the market) the overall performance and balance of the portfolio in question, and the needs and desires of the investor.
There are also many ways to reduce risk and take some money “off the table” besides selling entire positions. Selling only partial holdings, moving into less volatile holdings, moving more money into a cash or swapping stocks for fixed income might be other ways one might consider.
In conclusion, market falls and rallies are a part of the overall stock market reality. The crashes are the unpleasant part, and depending on how bad a crash might be, has a lot to do with how badly it affects both the investor and his balances. In my opinion, being at least a bit proactive when things go south may not only save some of your bacon, it may reduce stress and might also make you feel a little bit less helpless.
This article is opinion only, and may not represent those of this news media, its staff, members or underwriters, and should not be construed as investment advice or a solicitation to buy or sell any securities, nor represents the opinion of any bank, investment or advisory firm. Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access or monitor client funds, accounts, or portfolios. Marc can be contacted at (530)559-1214 or emailed at [email protected]
