With the S&P 500 up over 25% from the recent lows in March, I am starting to hear people say things like:
“I am thinking about getting back in now that things have cleared up.”
In fact, earlier this week I heard an interview on NPR with a recently retired couple that sold in March because they wanted to “sit on the sidelines until things clear up,” and now, they are thinking about getting back in, because things have apparently “cleared up.”
Over the years, I have watched this scenario play out countless times:
The markets go down. We get scared and want to get rid of the thing that is causing us pain. We want to sell. We just want to sit in cash for a while.
On the surface, this seems like a reasonable plan. Sell, then sit in cash until things clear up.
But unless you are making a permanent decision that stocks are not for you, you are planning to get back in. In fact, you are planning to get back in “when things clear up.” So before you sell it might be a good idea to define what it means for “things to clear up.”
If you feel like selling today, chances are you are scared. You feel bad. Your neighbor feels bad. The media says you should feel bad. That is why you want to sell.
So here is the big question? If you want to sell when the market is down because you feel bad, when are you going to feel like buying back in?
What is the world going to look like when we reach this magical point where things have cleared up?
For things to qualify as “cleared up,” it is safe to say that the media will be back to being happy. Your neighbor will be happy again. You will feel better, and THE MARKET WILL BE UP 20-30% from where you SOLD.
So follow me through this:
Market down, feel bad, want to sell.
Plan on getting back in.
Things clear up. I am feeling better. Want to buy back in. Market is UP!
That is a PLAN to sell low and BUY high.
There might be good reasons to sell (even with the market down), but this is not one of them!
To take it one step further, what if you buy back in (20 – 30% higher than you sold) and the light you saw at the end of the tunnel turns out to be a train?
Then what?
{ 7 comments }
Carl, you are so correct!! I have been preaching these same words for the last 3 months. I ask clients, “What criteria will you use to determine when “things have cleared up?” No one has a good answer. It is very subjective. “Well, you know, the market will be doing better and we'll be able to see that things are better.”
Not likely.
I've only had a handful of clients go to cash, but most of them are there for the foreseeable future because they're so scared. I had this exact conversation with my one “I'll get back in when things clear up” guy a few weeks ago.
If you get out at some emotional/subjective point (in his case, Dow 7000), how can you expect to develop objective, reliable signposts that things have actually cleared up and that it's time to get back in?
In my mind, things never clear up. Uncertainty and change is what moves the markets every day. We just tend to think they're more understandable when things are moving up because we're not scared.
Carl, you are so correct!! I have been preaching these same words for the last 3 months. I ask clients, “What criteria will you use to determine when “things have cleared up?” No one has a good answer. It is very subjective. “Well, you know, the market will be doing better and we'll be able to see that things are better.”
Not likely.
I've only had a handful of clients go to cash, but most of them are there for the foreseeable future because they're so scared. I had this exact conversation with my one “I'll get back in when things clear up” guy a few weeks ago.
If you get out at some emotional/subjective point (in his case, Dow 7000), how can you expect to develop objective, reliable signposts that things have actually cleared up and that it's time to get back in?
In my mind, things never clear up. Uncertainty and change is what moves the markets every day. We just tend to think they're more understandable when things are moving up because we're not scared.
Ya know, i think i saw an interesting article a while back… that advocated buy and hold.
The logic was shwing what happens if you leave the market after massive losses and only to return when the market returns to the old value.
Thats just silly… I think just as important as deciding when you will exit the market is an re-entry strategy. The problem is that htat is way too hard (normally)
Ya know, i think i saw an interesting article a while back… that advocated buy and hold.
The logic was shwing what happens if you leave the market after massive losses and only to return when the market returns to the old value.
Thats just silly… I think just as important as deciding when you will exit the market is an re-entry strategy. The problem is that htat is way too hard (normally)
Ya know, i think i saw an interesting article a while back… that advocated buy and hold.
The logic was shwing what happens if you leave the market after massive losses and only to return when the market returns to the old value.
Thats just silly… I think just as important as deciding when you will exit the market is an re-entry strategy. The problem is that htat is way too hard (normally)
Comments on this entry are closed.