Watching the stock market move up like a roller coaster to the top is great if you’re an investor. But everyone who gets on the ride knows that once you arrive at the top, it will come down sooner or later. The issue for the smart investor is when to jump off of the ride (safely) before it ends up back at the bottom. Depending on how fast the descent is, knowing when to get off is tricky. So as many people are getting nervous about the possibility of a bear market in the near future, there are five truths you need to remember before deciding to get off of the ride and watch from the stands.
1. The longer you hold on to your stocks, the higher your average return will be when you decide to get off.
OK, this depends on a number of x factors, but as a general rule it holds true. The simplest reason is the rule of experience. The longer you have been on a ride, the more you know about its twists and turns – and sudden plummets downward. When you are expecting something in life you are generally more prepared to deal with the situation. But keep in mind that age has a lot to do with this rule. If you are 30 and have been on the ride for a while, guessing wrong as to when to get off will not have as much impact on your lifestyle as someone who is 60 riding along side of you.
2. Been there, done that.
This has less to do with experience and more to do with doing your basic homework and realizing the stock market will go down at some point. Remember Bernie “he made off with their money” Madoff? Harry Markopolos, one man who investigated Madoff said that the performance angle of Madoff’s hedge fund was straight up on a 45 degree angle. The stock market will come down based on any number of human factors. Was the recent slide due to President Trump’s tariffs on China or the recent uptick in the Fed Rate and possible future increases? Could it have been both? The more you take your stock portfolio seriously, the less likely it will be that you will make a bad decision when the market starts to fall unexpectedly.
3. Trying to predict the future direction of the stock market is like trying to know what Kim Jung Un’s next decision will be.
The truth is – no one knows. We can listen to analysts, including our own, do our own homework, or listen to the guy who has been right 90 out of 100 times in the past decade. The stock market is a reaction of millions of people to a single or set of events. Donald Trump is elected president – market goes up. Same man decides on an import tariff – market drops 500 points in a day. He says he likes being unpredictable, not unstable. But whatever that percentage of unpredictability may be, it is certain to affect the markets and general economy. The only sure thing about the stock market is there is never a sure thing.
4. It’s a great time to look for those bargain basement values.
The old adage, “buy low, sell high” is so obvious it hurts. But a common mentality is not to buy stock at all because it will only cause you to lose more money. It is possible to do both. You can take some of the profit from the stocks you sell and use it to buy stocks that have a reasonably good chance of recovery when the market turns around (and it will). When the market starts taking a consistent downward direction, start scanning the market for stocks that do poorly in a difficult economy. Most will recover nicely, and you can be one of the few that will actually profit from the downturn over the long term.
5. If you decide to sell when the market is down, be sure to use logic and reason
Panic selling as a matter of history has never worked well for the stock market. But like Truth #1, your view of logic and reason will vary depending on a number of factors. An investor who sells much of their stock and converts it into cash at age 60 is just securing their future lifestyle. An employed investor who has not even begun to reach the height of their earning power is more likely to see selling their stocks as a way to retreat and prepare for the next round of stock purchases. In either case, it is always best to decide to sell at a profit even if the market has a short term bump up. There’s nothing wrong with consolidating your position and taking a profit as long as you are willing to jump back on board when the mood is more bullish.
The Great Recession is a decade old, and still has investors nervous. That might make some sense but it has more than a tinge of fear attached to it. These five truths can be applied during any market downturn, so if you apply them you are positioning yourself to make some good investing decisions, and come out on top when the dust settles.
Written by Garrett Parker
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