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Marc Cuniberti: When the markets fall

With the markets in free fall, investors are scrambling. The buy-and-hold belief works great when markets are normal, but during times of severe pull backs, the pain of seeing one’s hard earned savings evaporate daily makes the conviction to stay the course difficult, to say the least.

Indeed, over the long term, the chart of the Dow is up, and the current pull back on a long term chart is just one of many small familiar dips. That said, times like these do make some investors pull the rip cord and jump out of the market. Historically, that has not worked well. In the past the markets have always come back and jumped higher than previous to the crash. Just take a look at the Dow chart.

Those that do pull out, in my experience, just sit on the side lines and don’t get back in until there are many months, even years of a prolonged recovery, only to get back in late to the party, missing out on huge recovery gains. Once again, becoming unknowing victim of FOMO (fear of missing out) and sometimes get back in right when the next correction is upon us.

I once believed the buy and hold strategy was the ticket, until 1987, when, as young trader, I saw $400,000 fall to $220,000 in one day when the Dow crashed 22.6%. It recovered but the painful memory is still with me to this day.

The stress on me was unimaginable and I vowed to never make that mistake again.

I have rarely gone to all cash, with the exception of 2008 and March of 2020. Both of these events were complete a obliteration of capital as markets cratered mercilessly. There were other times when I wished I had been in all cash. Hey, it happens. But usually I exercise a middle ground strategy where as the market falls, I sell stocks on the way down, a little at a time. There are many indicators I look at that help me decide when to sell, but the obvious one is the market itself.

If markets persist in cratering down, my cash percentage gets larger and larger. This accomplishes three things:

• Gets me out slowly, helping protecting my capital from a complete obliteration (hey, it can happen). Some analysts are calling for more downside.*

• Builds “dry powder” for a rebound if and when it occurs.

• Eases the pain of the fall as being proactive gives me a feeling I am doing something and not just sitting there losing money daily and hoping it stops.

The combination of these three actions and mental thoughts not only makes me not so anxious, but is smart money management in my opinion. Validating this opinion is the fact that almost all professional traders practice some sort of loss limiting practices. They know being wiped out is always a possibility. If the professionals do it, it’s probably a good idea right?

For those listening to the buy and hold crowd, I would ask:

When told that, does it ease the pain even a little bit? Do you think seeing gains go away and then your principal threatens your mental and physical health? If you don’t sell anything, where will the money come from to buy stocks when the bloodletting stops if you’re all in and stay all in?

It doesn’t take a rocket scientist nor much common sense to arrive at the answers to these questions, and you’ll probably find you come up with the same answers I do. Those answers probably don’t jive with just sitting there doing nothing and hoping things get better.

* Wharton finance professor Jeremy Siegel gave a bearish stock market outlook, predicting the downturn’s bottom is still months away.

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214


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