Marc Cuniberti: Forensic recovery or buy and hold
Now that many investors portfolios may have been cut to ribbons, the phones are ringing with investors asking one of either two questions.
Should I buy stocks now or should I continue to hold my stocks?
Which question they ask depends on if they practiced prudent principal protection and had protective stops in place (sell points) and sold positions as the market fell, or whether they followed the “buy and hold for the long term” crowd down the rat hole of devastating losses.
I am of the opinion that much like the money management people might practice when playing a slot machine where at a certain point you pick up your chips and walk away, investors should practice the same action with their investments. After all, your lifetimes savings are much more important than the few hundred you might forfeit at the one armed bandit.
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That being said, I am always surprised to find that a number of advisors and investors alike do not practice nor even consider having a predetermined sell point to protect ones retirement money. They stick to the old adage “hold for the long term” and just ride a market down to wherever it might end up and where it ends up might not be a very nice warm fuzzy place. Instead it could be a place where one loses sleep as well as a good portion of their life savings. I hear the ring of “the markets always comes back” from the peanut gallery right about now but I doubt this time around those words are providing much comfort to those that have lost a good portion of their retirement savings in the recent sell off.
Although market crashes of this magnitude are rare, it seems in the last two decades we have seen three of them: 2001, 2008 and this one.
It seems that buying a bunch of stocks and blindly riding the market whichever way it goes is not much of a strategy and certainly is not worth a paycheck. My opinion of course. But if buying and holding is your desire, why not consider sitting on one of the myriad of index funds available on the public market and buckling in for wherever it takes you?
Not that I recommend that but it seems to be a popular consideration among investors and advisors alike. True the strategy may work in up markets and even work over longer periods, but it is a rare investor that can sleep soundly seeing the recent nuclear damage that may have just occurred to his funds, possibly wiping away years of hard earned wages. Not a pleasant experience to be sure.
So back to those two types of phone calls. The first is a call from a savvy investor that had stops in place either at his broker or in his mind and sold positions as the market spiraled downward. He now may sit on gobs of cash eyeing the current stock prices like a kid in a candy store.
Sure the market could go lower but this investor knows the blue light sale sign is lit and stocks may be 30% cheaper than where they were a month ago. The answer to this phone call might be as simple as buy some great companies at great prices and use the same method or criteria one used prior to the crash if it was working well.
The second type of call is more difficult and by far encompasses the vast majority of my calls lately. That call goes something like this: “I didn’t sell and rode it all the way down thinking the market comes back and how much lower could it go. Now I am down (such and such an amount) and I am sick to my stomach just thinking about it. What should I do Marc?”
This call is what I call a forensic rescue operation. Whereas the first type of call to develop a shopping list is an easy one, the call to fix damages done requires a more complex answer and a lengthy conversation with the investor to determine his level of risk, expectations and need for liquidity.
The last thing an investor wants is to sell at the bottom. But more losses are unacceptable and should be avoided at all costs. After all, the pain level has likely already reached a maximum for them to make the call and the investor is looking for solutions, not more of the same.
There very well may be excellent strategies for both types of calls but they are different in construction as they should be. Investors that have a lot of dry powder to spend are in a different mindset that an investor who is down 20% or more. Although solutions may exist for both, those solutions are quite different both in their make-up and implementation.
Marc. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, 530-559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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