Should you hold, or sell?

There’s a lot of froth in the markets right now, and one common theme that I hear repeated is ‘don’t buy high and sell low!  Variations on this include holding for the long term, not worrying about volatility, etc etc.

It’s all solid advice, but in one situation, I might suggest that selling is a better idea.

If the recent market moves are causing you serious distress, if you are worried about how much you have lost already, and how much you might lose today, then I’d suggest that you are out of your risk profile, and should dial it down.

That doesn’t mean that you are currently 100% stocks so you sell everything, and try to time when things are good again.. that’s a recipe for disaster.  What I’m suggesting is that you consider your asset allocation and see if there are ways to reduce the risk level for the long term.  This means instead of being 100% stocks (or even 80%) you consider reallocating some of that into bonds.

Bonds themselves have problems ahead, but these can be mitigated by controlling duration.  Duration is a financial term that is more complex than just the timeline (isn’t everything in finance?) but generally speaking, you can use a short timeline to find short duration bonds… things that mature in 2-3 years max.  The shorter the bond, the greater the predictability.  Unfortunately that means you know the return is going to be pretty mediocre, but at least it slows down the crazy.

The reason we need short duration bonds is because interest rates should (hopefully) rise within the next 2-3 years, when they do, bonds that have been issued will face a small decline in value.  The longer the duration, the greater the decline.

Note – when I talk about bonds, I typically mean Bond Funds (ETFs or low cost Vanguard types), because it allows access to a diversified mix for a low cost.

Look at your debts

If you are in the position to have maxed out your tax advantaged accounts and are funding taxable brokerage accounts, it might be a good time to look at your long term debt situation. Debts are guaranteed return vehicles, so any lingering student loans at a high rate of interest might be a better place for your savings.

Wrap

While it would have been perfect if you had thought of this overexposure to stocks a week ago, and while selling may seem wrong with all the smart money saying hold, you might want to consider the past few days as a wake up call, and realize that things can get a lot worse from here.

If your investment strategy is causing you emotional distress, or, if the markets open with a sharp pop and you are elated, you might be overreaching, and may want to take something off the table, and create a strategy that is a little more boring, but helps you sleep at night.