With markets limit down 5% in futures trading, oil down almost 26% right now, and no real resolution of any of the items worrying markets, it’s understandable that we’re getting a lot of posts on here discussing going to cash, selling, reducing risk, etc.
I’m not going to argue against the merits of going to cash as I’ve had a fairly negative view of market risk and fragility over the past 1-2 years, but I think it’s critical to mention that if you do plan to do this, you NEED to have a plan for how to get back into markets. Most people trying to do this type of thing are just going to get whipsawed around by volatility, and end up losing more than they would by just staying long.
But if you want to go to cash…
- You really don’t want to be the guy who has been holding cash for 5 years as the market recovers, thinking that we’re due for another enormous leg down in markets. (IE, the friend who has been in cash since 2016 persona)
- Similarly, you don’t want to panic buy back in as we see a volatility induced bull trap causing you to buy back in after a 3% rally, only for further drops to cause you to then sell lower after buying higher.
The main point here, is you don’t want to get whipsawed by highly volatile markets, and you also don’t want to just completely sit on your hands and do nothing over the next 5 years.
Have Some Rules or Something At Least Somewhat Quantitative
It doesn’t even have to be a great system or anything complex. But if you’re just going with your gut, your feelings, or your emotions, you are going to get torn to shreds in any bear market. Highly volatile markets see dramatic price movements, shift momentum extremely fast, and do not always make a lot of fundamental sense.
- Do some research on past bear markets, and then have a plan for how to buy back in, and what to do when the market seems like it may not be going the way you though it would when you re-purchased lower.
- Have a pre-defined time frame. If you’re a day trader, your time frame will obviously be way different than long term investors. It’s okay to have different time frames for different things, just know in advance what your plan is.
- Don’t freak out over taking some losses and lose sight over what your process is. Expect to take some losses, but come out ahead on average if your process is sound in the first place.
- You are going to be at the mercy of your process. If you don’t feel confident in your plan, consider just DCA’ing, or switching to a much more durable all-weather type portfolio. Keep in mind, most plans are based on some type of recency bias. IE, they may not work in the current market because things are always somewhat different.
- IF you’re building some rules around buying back in, try to have it be consistent with the rest of your investing strategy. If you’re a value investor, keep value investing – have rules around what valuations you expect to see before repurchasing. Technical investor, have rules set for whatever you use. You may even get better results when you overlay multiple rules together to form a more robust framework.
So overall, TLDR, if you’re going to be bearish or if you’re going to try to avoid a potential bear market, having a process for re-allocating to risk is just as important for being successful as is trying to get out before a bigger drop. If you can’t figure this out, it’s probably better to find a solid portfolio you allocation you can trust in turbulent times, and dollar cost average in.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.