Should You be Taking Money Off the Table?

Lindsay Crosby |

      In the recent weeks the stock market has struggled as the trade war escalates.  We have fielded a few calls into our office from investors who feel the market is due for a significant drop.  Their questions are similar, but ultimately, they want to know if they should sell out of their investments.  Before I provide my recommendation, there are a few things to consider regarding your specific situation.

     I think it is important to take a historical view on market drops.  The most common type of significant market drop is known as a Correction.  A Correction is a reduction in the market by 10% or more.  Ten percent drops in the market are common and investors should expect to see them at least once a year.  A more significant but less common drop in the market is known as a Bear Market.  A Bear Market is a reduction in the market by 20% or more.  Historically, on average, we see a Bear Market at least once every three years.  While Bear Markets are often associated with a recession, we do not need to be in a recession to experience a Bear Market.

     In a perfect world we would sell out of the market prior to a significant downturn and reinvest when the market is at its lowest point.  However, there are a few things working against this approach.  First, it is nearly impossible to consistently and correctly anticipate market tops and bottoms.  Research data shows most investors cost themselves significant return by selling too soon or selling after the market has already dropped.  Second, if your investments are not in an IRA there could be serious tax consequences for selling out just to avoid temporary loss (permanent tax loss for relief of temporary pain). Studies show with historical data that with a diversified portfolio of stocks, bonds, cash and alternative investments, investors are better off staying invested and allowing their accounts to reinvest dividends throughout the market downturn. If an investor’s time horizon is 10, 15 or 20 years, a Correction or Bear Market now does not threaten their financial success, as long as they do not panic and sell in the midst of the downturn.  If the investor’s time horizon is less than 5 years, they should already be invested in an allocation that limits downside potential.

     If your time horizon is 5 years or more and you have a diversified portfolio with at least three asset classes (stocks, bonds, cash, and/or alternative investments) my recommendation is to control your emotions and ride out the downturns, viewing them as gifts with dividends reinvesting along the way.  But what if you can’t do that?  What if your current stock exposure is greater than your actual risk tolerance?   This can certainly happen.  We have had quite a run in stocks for the past decade and if an investor hasn’t rebalanced their portfolio at least annually, they likely have much more exposure to risk than truly matches their risk tolerance.

Should you sell in anticipation of a market downturn?

  1. If you have a diversified portfolio and your time horizon is 5 years or greater, I would not recommend trying to time the market. Studies show you have a much greater chance at missing out on return.  Control your risk and stay invested.
  2. If you have been someone who has not rebalanced your portfolio through this rising (Bull Market) now is the time.   Your advisor should be able to provide you a confidence level as to what your downside risk is at any point in time.  If you are a professional investor you already know what your downside risk is at any point in time.
  3. Successful investing is more about habits and human emotion than it is math.  If you know that you will have a problem not touching your investments during a significant market downturn then its time to take some money off the table.  Although history tells us to stay invested, a bigger risk than trying to time the top is to panic and sell at the bottom.  If you know this is the case for you, it’s time to de-risk your portfolio a bit.  I don’t recommend going all to cash because ideally, you’d want competitive interest and dividends to be generated during a downturn, but stock exposure can be cut back to control the downside.  Our Moderate allocation is currently only 38% stock exposure.  Our Conservative model is only 16% at this point in time. They are full of dividend paying large cap stocks and defensive stock sectors like utilities and healthcare.  Both are examples of investment portfolios that allow you to at least participate in some market growth while significantly limiting your short-term downside risk. 

 

Crosby Advisory Group, LLC is a Registered Investment advisor in the state of Ohio.  At any time you may request a copy of our Form ADV 2A and Form ADV 2B, which provides information about the qualifications and business practices of Crosby Advisory Group, LLC.  This article is for information purposes only and should not be taken as direct investment advice for you without a consultation. Investing involves risk and you should carefully consider all risks and expenses before making an investment. Crosby Advisory Group, LLC is also a licenses insurance advisor.  Insurance products are serviced through Crosby Advisory Group, LLC.  If you have any questions you can send us a comment by visiting our website at crosbyadvisory.com Our office number is 419.496.0770