Stock Investing: Taking Your Money Off The Table Until Things Calm Down?

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Like most articles you’ve seen about about the recent market gyrations, I think people with long-term investments should act like it and not do anything special. But really, the past several days was nothing compared to real fear and uncertainty. In early 2009, a phrase I heard often was “I’m just going to take some money off the table until things calm down. Why risk it?”

Well, here’s a chart from FiveThirtyEight.com comparing the results of a “cautious, play-it-safe” investor and the “do-nothing” investor:

538_markets

Imagine two people who each invested $1,000 in the S&P 500 at the beginning of 1980. The first one buys once and never sells. The second one is slightly more cautious: He sells any time the market loses 5 percent in a week, and buys back in once it rebounds 3 percent from wherever it bottoms out. At the end of last week, the first investor’s holdings would be worth $18,635. The second investor would have just $10,613.

Remember, the only two possibilities for the stock market are all-time high or a drawdown. The highs you don’t really feel. The drawdowns are quite painful. Here’s a nice chart from Doug Short illustrating the drawdowns since 2009. Lots of painful drawdowns, but during that time the market is up over 200%.

538_dshort2

This is also why financial advisors tell you to create an investment policy statement. That’s where you write down ahead of time “If the markets drop 10% in a week or two, I will do [action or lack of action] because [reason].” Then when the drop actually happens, you break out that piece of paper to remind yourself what the calm, rational version of yourself would have done.

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Comments

  1. Great point!. I was trying to free up cash on Monday to buy up several stocks that were getting hammered knowing that nothing changed with the fundamentals. Couldn’t do it fast enough. I was, however, ecstatic to get FB so low considering it’s a $110+ stock IMO. Couldn’t believe the bargains for NFLX, NXPI, AAPL, FB, GOOG, UA, CLB, BIDU and several other strong performers. Crazy, but for those that weren’t scared off by the volatility, acted patiently, and bought in at or near the bottom, they are very happy right now. And full disclosure, of the stocks I mentioned I only own FB and GOOG.

  2. Thanks but I’ll follow along with former NY Governor Eliot Sptizer’s advice: “you can’t win so don’t play”.

  3. I’d like to see a similar graph showing what would happen if you sold $1000 of total bond market and bought the S&P 500 every time the S&P dropped 5%. Then when it rises 3% above the purchase price, sell and go back to total bond market.

  4. Added a chart from Doug Short that shows all the drawdowns since 2009. The drawdowns are what you feel, but during that time the market is up over 200%.

  5. Hey john, do you still own enphase energy in your personal portfolio?

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