Would selling right now be such a poor decision?

[NW-Bound]

Not sure what you're spun up about. The context of the OP's question is clear in his post. He's talking specifically about a rule for buying back in. IMO Mencken's observation applies:

But if you want to talk about rules like "Maintain constant AA and rebalance at beginning of year?" they are neither right nor wrong, really. They are never going to be right in retrospect because they will never consistently maximize total return. But they are never really wrong, either, because they are useful in contemplation of a totally uncertain future. Really they are not rules at all, rather they are sort of aphorism.

"Maintain constant AA and rebalance at beginning of year" is not a bad thing to do. Lots of people would do a lot better financially if they follow that. I do not do that though.

I was just teasing people who take that as a religious dogma.

 

[marko]

When I get to feeling like the OP, I run FIREcalc and put my fears to rest. .

I look back ten years ago to late 2008 and early 2009.
Lost a bundle on paper; stayed the course and made it all back in short order

Good new/bad news: I'm pretty fearless now as a result.

 

[NW-Bound]

Selling is stupid. If you think you know the market is going to fall, buy a put.

If you are sure a stock is going down, sell everything. For example, you have inside information.

If you think the likelihood is high, take some off the table.

Puts are expensive insurance and not cost effective, and should be used in some cases only. For example, if you have a lot of an individual stock you want to sell but are still waiting for the 1-year period to get long-term cap gain treatment, you may want to buy a put for them.

 

[limeyx]

I think this is good advice.

Andrew Coyne: Why are stock markets falling? No one knows. What should you do? Nothing | National Post

Going on vacation. Will check stock prices in March !

 

[dallas27]

If you are sure a stock is going down, sell everything. For example, you have inside information.

If you think the likelihood is high, take some off the table.

Puts are expensive insurance and not cost effective, and should be used in some cases only. For example, if you have a lot of an individual stock you want to sell but are still waiting for the 1-year period to get long-term cap gain treatment, you may want to buy a put for them.

Puts are far higher leveraged on you prediction. If you are going to make a bet you know what is going to happen, make a leveraged bet with limited downside.

But to each his own.

 

[Paracelsus]

I have stock options that I have to sell in the next year. The market fall isn't affecting me. The stock options were issued in 2008 when the market was way down and have risen about 4x their value in the last ten years (even including the current down). Frankly this will be a nice profit to add to my play money this year. Current plan is to sell 1/4 of the option package every quarter of the coming year.

 

[njhowie]

But, is it a loss if an investor sells some of his holdings at a huge (and probably unwarranted) profit? My Boeing is up about 100%. I bought it for its dividend, not for its potential capital gain. It wasn't supposed to go that high. Stupid Boeing.

If the investment no longer meets your investment objective/criteria, then there is absolutely nothing wrong with selling some or all of it.

If you purchased for the dividend, and now the dividend yield is 1/2 what you purchased to lock in, then by all means ... sell some. Sell half and let the other half ride - it's pure profit.

There's nothing particularly exciting in my eyes about Boeing trading at 30 PE with a puny 2% dividend yield...not when rates are rising and you can lock in 2% with a one year CD today.

 

[NW-Bound]

Puts are far higher leveraged on you prediction. If you are going to make a bet you know what is going to happen, make a leveraged bet with limited downside.

But to each his own.

Sure. You know what you do, and it is fine. People do use them for different reasons.

For others who are curious to see if it is for them, I just looked up some numbers.

SPY, the granddaddy SPDR S&P 500 ETF, is at 261.50. A put option expiring July 20, or 5 months from now, which guarantees you will get at least 261, the strike price, last traded at 13.40. That "insurance" premium is 13.40/261 = 5% of your principal.

Individual stock options are more expensive, of course because individual stocks are more volatile. To guarantee that you keep the current price of your Boeing shares at 330, you need to pay 30.75, expiry Aug 17. That premium is 9.3% of principal.

For kicks, I looked up Amazon. Put option at its current price, expiry July 20, is at 11.6% of principal. The market is not stupid. It knows that Amazon is riskier than Boeing, which is more volatile than the entire market.

PS. You can get leveraged options, but these are even more expensive.

 

[dallas27]

Sure. You know what you do, and it is fine. People do use them for different reasons.

For others who are curious to see if it is for them, I just looked up some numbers.

SPY, the granddaddy SPDR S&P 500 ETF, is at 261.50. A put option expiring July 20, or 5 months from now, which guarantees you will get at least 261, the strike price, last traded at 13.40. That "insurance" premium is 13.40/261 = 5% of your principal.

Individual stock options are more expensive, of course because individual stocks are more volatile. To guarantee that you keep the current price of your Boeing shares at 330, you need to pay 30.75, expiry Aug 17. That premium is 9.3% of principal.

For kicks, I looked up Amazon. Put option at its current price, expiry July 20, is at 11.6% of principal. The market is not stupid. It knows that Amazon is riskier than Boeing, which is more volatile than the entire market.

PS. You can get leveraged options, but these are even more expensive.

Options are leveraged by definition.

 

[Hamlet]

Sure. You know what you do, and it is fine. People do use them for different reasons.

For others who are curious to see if it is for them, I just looked up some numbers.

SPY, the granddaddy SPDR S&P 500 ETF, is at 261.50. A put option expiring July 20, or 5 months from now, which guarantees you will get at least 261, the strike price, last traded at 13.40. That "insurance" premium is 13.40/261 = 5% of your principal.

Individual stock options are more expensive, of course because individual stocks are more volatile. To guarantee that you keep the current price of your Boeing shares at 330, you need to pay 30.75, expiry Aug 17. That premium is 9.3% of principal.

For kicks, I looked up Amazon. Put option at its current price, expiry July 20, is at 11.6% of principal. The market is not stupid. It knows that Amazon is riskier than Boeing, which is more volatile than the entire market.

PS. You can get leveraged options, but these are even more expensive.

Yeah, I think Netflix is likely to eventually be worth a small fraction of what it is worth today. I looked into what it would cost to buy long term puts that were far out of the money to see how much I could make if I were right. The spreads and premiums were just not attractive. The house gets a huge cut with options. There is just no way I’m going to be smart enough to beat that juice.

 

[dallas27]

Yeah, I think Netflix is likely to eventually be worth a small fraction of what it is worth today. I looked into what it would cost to buy long term puts that were far out of the money to see how much I could make if I were right. The spreads and premiums were just not attractive. The house gets a huge cut with options. There is just no way I’m going to be smart enough to beat that juice.

Agreed, the option price should represent the breakeven result. Black-Shoals’s helps tell us what that is. But the premise of this thread was someone knew the market would drop, so in that scenario this is a way to leverage that prediction with maximum gain and minimum risk.

 

[Surewhitey]

We sold our WMT, TGT and HAL 1-2 weeks ago...20% of our taxable accounts. Dipped our toes back in with some VDE yesterday. All the sells are down from the sell price by 2-17%. Will be looking for some more opportunities over the next couple weeks.

 

[Lsbcal]

What if a person who has been buying equities for the last nine years and now, right now decides to sell, let's say, a 1/4 of his equities--would that be such a bad decision? He might not be selling at the low (or if it turns out to be the low, it would be a very, very high low). Let's also say that taxes are not a significant factor.

I know just such a person. It was me on Nov 29th. I moved 10% of equities into a 50/50 combo of short term bonds and intermediate bonds (my current bond allocations). How did that work out? Here is the chart comparing the SP500 (VFIAX), short bonds (VFSUX), intermediate bonds (VFIDX), and money market (VMMXX):

The slight winner so far by a small margin is the money market (which I did not move anything to). So what is the difference between Nov 29th and now? Not much except for psychology.

Why I reduced the equity allocation: I ran VPW with the spending model and it indicated for my age what we had was going to allow for some very generous spending even in the worst markets (like 1966 through the 1970's).

Another thought. In the 1970's going to bonds was not much better then remaining in stocks. Could that kind of thing happen again? The very short term chart above gives a possible hint.

 

[audreyh1]

Some moments in time. Sure VFAIX swung up a lot since Nov 17 before finally dropping. But it could easily drop below the bond funds. You never know.

 

[FiveDriver]

Lsbcal--

Thank you for that chart, that's very good information.

 

[Lsbcal]

Some moments in time. Sure VFAIX swung up a lot since Nov 17 before finally dropping. But it could easily drop below the bond funds. You never know.

Right, this story is not over ... it never ends.

 

[OldShooter]

Right, this story is not over ... it never ends.

Absolutely true. And, importantly, market price signals are so noisy that it takes a five or even a ten year look to separate the signal from the noise. No reliable conclusions can be drawn from short periods.

I have seen a video where Eugene Fama bemoans the fact that 90 years of stock market data is not enough to permit reliable statistical analysis.

... You never know.

Amen.

 

[Pilot2013]

Where are all of the folks on here that just over the last year or so that I have been on this site, always pointed people to Firecalc and other simulations that show selling and buying during turbulent times is just plain bad. I am seeing people now say "this is different".

If you are/were close to RE and heavily in market, you took a risk. If you are a ways out, I see no reason why the same advice (Firecalc, etc0 shouldn't apply.

 

[Lsbcal]

Perhaps I should have added that the stock market story never ends but it does end for each individual. So particularly for folks on this site who are getting up there in age, it's important to consider AA adjustments as markets move towards extremes.

 

[OldShooter]

... I am seeing people now say "this is different". ...

Sir John Templeton, an influential 20th century American-born British stock investor, said:

“The four most expensive words in the English language are: ‘This time it’s different.’ ”

 

[redduck]

I know just such a person. It was me on Nov 29th. I moved 10% of equities into a 50/50 combo of short term bonds and intermediate bonds (my current bond allocations). How did that work out?...The slight winner so far by a small margin is the money market (which I did not move anything to). So what is the difference between Nov 29th and now? Not much except for psychology.

Another thought. In the 1970's going to bonds was not much better then remaining in stocks. Could that kind of thing happen again? The very short term chart above gives a possible hint.

Thanks Lsbcal for the chart and the interpretation of the chart. Glad we thought alike (even if it were only for a few minutes).

 

[redduck]

OK, I'd like to explain in a bit more detail some of my thinking here:
I was initially wondering if selling right now would be such a poor decision. I wasn't thinking about a friend and wasn't necessarily thinking about me. It was just a strategy. Here goes:

Because the market has been volatile (mainly heading down), the idea was that if a portion of the portfolio were sold (taxes are not an issue) and placed in a money market fund and the market continued to head down, the nest-egg would be spared to some degree. If the market went up, nothing would be lost (except what would have been gained if one stayed in) but, the value of the nest-egg would remain the same (except for the remaining investments still in the market).

So, yes, if the market goes up, the investor doesn't have the additional money to by a Honda, but if the market continues to drop, he hasn't lost the money to buy the Honda. And, the deal is the investor re-enters the market on a pre-set date (e.g. two months from when the strategy is implemented).

 

[Hamlet]

OK, I'd like to explain in a bit more detail some of my thinking here:
I was initially wondering if selling right now would be such a poor decision. I wasn't thinking about a friend and wasn't necessarily thinking about me. It was just a strategy. Here goes:

Because the market has been volatile (mainly heading down), the idea was that if a portion of the portfolio were sold (taxes are not an issue) and placed in a money market fund and the market continued to head down, the nest-egg would be spared to some degree. If the market went up, nothing would be lost (except what would have been gained if one stayed in) but, the value of the nest-egg would remain the same (except for the remaining investments still in the market).

So, yes, if the market goes up, the investor doesn't have the additional money to by a Honda, but if the market continues to drop, he hasn't lost the money to buy the Honda. And, the deal is the investor re-enters the market on a pre-set date (e.g. two months from when the strategy is implemented).

My question is why would you want to mindlessly re-enter the market in two months? Why are you assuming that that will be a better time to be invested? What if the market shoots up before you buy back in and then drops back down again, putting you in the same spot with less money?

I think it makes sense if you sell to reduce your asset allocation permanently. It also makes sense to sell because you think the market is overvalued and you are willing to buy back in if valuations become more compelling. That is actually what I did on the way up. I’ve been reducing my stock allocation slowly as prices have risen over the last two years ( from about 90% to about 70%, so I’m still heavily invested). If the market drops to a compelling valuation, I’ll increase my stock percentage back up. If it doesn’t, I’m still heavily invested in stocks, so no big deal that I’ll miss out on some upside.

Selling because you are scared now but think you magically won’t be scared two months from now is going to get you whipsawed, IMO.

 

[Lsbcal]

I have mentioned this on another thread: if this were 1962 or 1987, a good market timing strategy was to get out at the top and buy back 3 months later. Now we are not at the top. But those declines were -20% and -30% respectively. So a ways to go if 2018 is similar to those declines.

CAVEAT: I am not saying this is the right thing to do, just an observation for consenting adults only.

The reason 1962 and 1987 are kind of special to me is that they were declines in a good economic environment so probably due to stock market greed/fear and not to oncoming recession data (as seen in employment, sales, etc.).

 

[GravitySucks]

OK, I'd like to explain in a bit more detail some of my thinking here:
I was initially wondering if selling right now would be such a poor decision. I wasn't thinking about a friend and wasn't necessarily thinking about me. It was just a strategy. Here goes:

Because the market has been volatile (mainly heading down), the idea was that if a portion of the portfolio were sold (taxes are not an issue) and placed in a money market fund and the market continued to head down, the nest-egg would be spared to some degree. If the market went up, nothing would be lost (except what would have been gained if one stayed in) but, the value of the nest-egg would remain the same (except for the remaining investments still in the market).

So, yes, if the market goes up, the investor doesn't have the additional money to by a Honda, but if the market continues to drop, he hasn't lost the money to buy the Honda. And, the deal is the investor re-enters the market on a pre-set date (e.g. two months from when the strategy is implemented).

This is pretty much the definition of market timing. Never worked for me before. Don't think it would now.
How about sell now, use the money to go to Tahiti, check your portfolio when you return in two months.