Should Stock Investors Take Money Off the Table Now?
People have been discussing all year whether or not investors should pull back or even get out of stocks. This dialogue is picking up again, and this is at least worth thinking on.
We have to speculate as to why any investor who is not close to needing to cash in would want to do so at a time when the going is so good with stocks. We do know that there seems to be a natural tendency toward this among at least some investors, as well as some traders, where they start looking at what they made in a trade or investment, think that it is at risk, and then be at least tempted to do some selling.
Those who trade are a lot more familiar with this situation than investors are, simply because traders place so many more trades and therefore have a lot more opportunity to make mistakes and learn from them.
If we just approach these situations with a disinterested view, where we allow the probabilities to decide, or at least our best attempts at determining what side the probability is on, then these decisions do become easier. Whenever we throw in emotions, emotions and trading or investing just don’t mix, so we need to be careful.
The first thing we need to do is to ignore how much we are up or down in an investment. Investors are generally up quite a bit in long bull markets, and they may look back upon the last few years and feel grateful as well as wanting to avoid pushing their luck.
We may not realize that we are corrupting the current situation with the past, and this is just another way of looking to sell because you are up, which is never a good reason to do it.
It is not that the past action of a stock or a stock index does not matter, but the fact that we have been in it for a certain amount of time and have experienced a certain gain, or loss if we’re dealing with bearishness, does not matter at all. Wherever these stocks go, where we entered might matter to us but does not matter at all to the stock and has no material effect on its future performance.
Even though this appears to be obvious enough, it is not so obvious to a lot of people who actually will take their personal results into account when deciding whether to get out of a stock.
The task at hand has nothing at all to do with the past, it concerns the future, as in where we are going and whether or not the probabilities of our positions moving in our favor are favorable enough over a given period of time.
This includes things like the market has come this far over this long and must be getting tired. Quite a few people out there would find this to be at least somewhat influential, and it might be if this mattered, if there were a time limit on bull markets for instance or if the fact that one has gone on for as long as it has could cause the probabilities to turn negative.
If anything, the longer a run we have, the more likely it is to continue, by virtue of momentum. You could take any point since 2009 and selling there would have proved to be a mistake, and that’s a lot of potential exits that have failed. This includes all the calls to sell earlier this year as well, by people who thought we must be getting tired, but stocks just continue to forge ahead anyway.
We always need to assess the potential outlook for an investment, from the moment we open a position to the moment we close it, but there are two components to this analysis, the outlook itself and the way that this outlook is materializing in the markets.
It’s Not That Hard to Spot a Real Bear Market, and it Looks Nothing Like This One
If, for instance, we knew for certain that a bear market will be coming in the next few years, one that would ultimately have us wanting to sell, and needing to sell actually if we are looking to protect our accounts and wealth, this in itself is not a reason to sell now. The outlook may portend this but we also need to know the timing, and if we move up 50% before then and could get out with 40% more return than we have now if we wait, we’d really be hurting ourselves by being so impatient and foolish.
We’ve spoken about this in several articles this year already, preaching patience in the face of all the concerns that we’ve seen so far this year, recession worries, earnings recession fears, concerns about more tariffs and the effects of current ones, the Fed not pitching in enough, and whatever else that has weighed upon our patience this year.
Our response has always been to wait and see, and that’s what we always need to be doing, since we actually need to be seeing the tables turned over before we should be acting. This is even true if you are looking to get out in the next year or two regardless, because you still should not be leaving money on the table by being so unreasonably risk averse now.
The fact that we are still making all-time highs should bolster our confidence, where selling previously would have been a clear mistake, because there wasn’t enough of a reason out there to do it. This is still the case now, as we need to see the rain hit the ground before we can say that it is actually raining, not just have the potential for rain on the horizon where it may or may not come.
We can really learn from the tactic that traders use where they hold their trades to the point of failure, where failure here means their expectations turning from positive to negative. While some do sell on the way up if they are long, they do so more often than not when the expectation is still positive and they should therefore be buying more here if anything, not selling.
We therefore need to set an exit threshold, what needs to happen to turn the odds against us, and while we can set this threshold pretty tight, we also need a plan to get back in if we are wrong. This might be the biggest mistake that investors who look to time their positions make, and are willing to take what would have been a small mistake if they got back in and turn it into a much bigger one as they watch the stock ride off to more glory without them.
This strategy could have been used by even the most eager to sell investors lately, and while there really hasn’t been anywhere enough of a reason so far this year for investors to sell, if they had done so anyway and the bear market coming turned out to be an illusion, they need to immediately get back in and cap the cost of this mistake.
We Should Always Watch our Stocks, But They Must Be Allowed to Speak
The market itself hasn’t shown us any real concern over the bears taking over, but individual stocks can do this quite often, and we should always monitor our individual positions if we invest in individual stocks. Doing this does require attention, as if you are going to pick stocks you need to focus on picking the right ones, at least doing your best at this, and also make sure that they remain worth holding throughout the holding period.
In bull markets, there are less dogs out there, but there are plenty of them in any market environment, and we want to be out of these. What we really want to be doing in fact is to do our best to have our money in the ones that are performing well and avoid those who aren’t, including rebalancing things to weed out the paupers and focus more on the princely stocks.
Bear markets have a tendency to put an end to this party altogether, and while you can swim against the tide and make money from the long side with stocks when the market itself is tumbling, this requires a lot more skill than investors have and is best left to the pros, meaning professional traders not professional investors, who tend to be weaklings in bear markets and get pounded right alongside the amateurs.
Perhaps they may experience smaller losses than run of the mill investors do, but that is something we should never be proud of, especially when we could have done so much better if we actually ran away from these things when we should.
In bear markets, traders bet on the bears generally, so this doesn’t really come up with the skilled traders anyway, even though a lot of traders aren’t skilled and will continue to trade long positions in downtrends, especially with ones that just hint of recovery. We should not be trading or investing on these hints and we need a lot more than that to want to take on the risk of a bottom play in a bottoming market.
It is always a good time to pay a visit to our positions and assess them based upon their performance and outlook, which usually has nothing to do with bull or bear markets. There are times where the market will threaten to take most stocks down with it and that’s the time that you want to be thinking of packing up your tent and leaving the campground, for a while at least.
The market is not threatening this or anything close to it right now. This is not the time to pull out, even though to those of us who encourage investors do a lot better job at timing their positions, it is somewhat heartwarming anyway that some would consider this when it is not even reasonable to do.
When the time comes where it is, when the fears that are out there start to materialize enough for us to say that we’re more likely to do down for a while than up, hopefully this will break through their thresholds and they will make the right choice for themselves.
When someone is throwing money at you though, that’s not the time to run, it’s when they instead look to take our money from us where we’re running to escape this. The robbers are well in check and the money is still flowing right now though, and we need to make sure we’re getting scared by what should actually scare us and not just look to run from shadows.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
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