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Sound Advice: February 2, 2022

Should I sell my stocks before the upcoming bear market?

Yes, that may be sensible. If this idea works for you, make sure to sell them about a week before the market crashes. Then all you need to do is buy back in about a day after the market hits the bottom. If you can manage this extraordinary feat, you will make history.

Seriously, however, unless you can perform the above magic, you will have to consider your investment time horizon. Following temporary downturns, markets always recover.  Sometimes the upturn is slow, but in the aftermath of the pandemic plunge, the rebound was unusually rapid. 

Market drops tend to be unnerving. The more useful view of these events is that stocks are on sale at lower prices.  There is, of course, the temptation to think that this time everything’s going to zero, though if that’s the case it really doesn’t matter what you do.

To be successful in this ill-advised approach, two correct decisions are required: When to sell? When to buy?  Keep in mind the fact that during the time you are not invested, you will not receive dividends from your investments.

Over the past four decades, during one of the longest (if not the longest) bond market rallies in history, skittishness in the stock market often gave rise to thoughts of redeploying to bond investments.  Looking ahead, however, the prospect of significant increases in interest rates and reduced financial stimulus by the Federal Reserve Bank argues strongly against moving to bonds.  When these actions take place, bond prices will fall.

Whether to sell stocks to avoid a bear market is a serious question, but unless you are a miracle worker who can time the market consistently, you will end up a loser.  Market drops are regular occurrences.  In the majority of years, there’s an interim pullback of 10% to 15%.  Less often, there are more dramatic downturns.  But these are part of a long-term pattern.

If you sell now and the market continues to rise, you will kick yourself. If you sell and the market drops, you will be happy. But then you will ask, ‘When should I buy in again?  If you buy too early and the market continues to drop, you’ll be upset.  If you wait too long, you’ll be disappointed.  Bearing in mind that there are only a few “great” days in any year when stocks perform spectacularly, if you miss those you miss the year.

I cannot give you a definitive answer.  That is why stocks are a long-term investment. The longer you hold them, the more profitable they tend to be.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883 

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

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