Tuesday, September 23, 2014

Sell your stocks now!

Update January 24, 2015: My brother got back into two stocks and an index fund.

Update October 29: The small, -7.4% correction appears to be over and my brother is looking to get back into the stock market. Will there still be a larger correction? I will write another post in November to discuss this. Still, the advice in the last paragraph stands.

My brother, based on my recommendation, sold the index fund and both stocks in his IRA yesterday. Many stock advisors are saying that the S&P 500 is due for a "correction" of 20% to 30% by the end of 2015. But nobody knows when. So, instead of trying to time the peak, he went ahead and sold his index fund and captured a 22% gain.

The problem with waiting is that when you realize that it's time to sell, so does everyone else and it's too late to keep from losing large sums of money. The stock market can drop over 22% in one day, like it did on Black Monday in 1987.

The next step is to find a bond fund that invests in short-term corporate bonds (one to two year maturity) and try to capture a 2% to 3% return until the S&P 500 has its correction. Then we can sell the bond fund and get back into an index fund.

Ultimately, the S&P 500 will undergo its correction and then start heading back up. That's when you get back into stocks. Despite many advisors saying that this is time for that now, it isn't simply because it hasn't hit bottom yet. In my opinion, timing the exact peaks and valleys is really difficult and I don't try to do that. But timing 20% corrections and 20% increases isn't as hard.

Before making any investment decisions based on this blog post, please read my investment advice disclaimer.

I've found rather few investment advisors who are willing to recommend selling 90% or more of your stock holdings at the peak. To me, this is one of the keys to long-term gains in the stock market. If your investment advisor isn't willing to make dramatic changes to your portfolio, you should find one who will.

Scorecard: How good is my prediction?

DateS&P 500 CloseChange From
Recent Peak
Change From
Sale Date
Comment
Sept. 18
2,011.36
Recent peak
Sept. 23
1,982.77
-1.4%
Sale
Sept. 30
1,972.29
-1.9%
-0.5%
One week after sale
Oct. 6
1,964.82
-2.3%
-0.9%
Two weeks after sale
Oct. 13
1,874.74
-6.8%
-5.4%
Three weeks after sale
Oct. 20
1,904.01
-5.3%
-4.0%
Two weeks after sale.
Correction is over.
Oct. 27
1,961.63
-2.5%
-1.1%
Three weeks after sale

Updated Oct. 29 to add figures and a paragraph at the top about getting back into stocks.

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