I received several emails over the weekend from people who are really struggling and panicking about this market. This is not the end of the world. This a correction, plain and simple! The biggest challenge most people are having with their investments is: Should I just leave everything alone? Or should I cash some out?
The reality is that people want the best of both worlds, and that is not very realistic. In other words, when the market mostly goes up (as it did from 2013-2015), everyone wishes they were fully invested and let things run. When the market corrects (as it is doing now), everyone wishes they were more proactive and reduced their equity exposure.
My answer is: The market is healthy 2 to 3 times per year. When it is healthy, expose capital to the strongest growth stocks that have potential to appreciate in price. When it is unhealthy, reduce exposure and get defensive! Here’s the biggest problem with this philosophy. Most people believe it can’t be done, mainly because they don’t want to put in the time or effort. In addition, the majority of people don’t have enough confidence in what they are doing and don’t want to make decisions out of fear.
Currently, my clients are 100% cash. We’ve been in 90+% cash since the beginning of the year. Normally, I don’t like to share my investment levels publically because: A) I don’t want anyone to blindly follow me B) I encourage people to think for themselves and C) I can change these levels very quickly. As Stanley Druckenmiller says “Probably one of my greatest assets is that I can change my mind very quickly.” In other words, when conditions improve, I have no problem making decisions and getting back in. Hesitation and sitting on the sidelines for years doesn’t exist in my book.
This strategy isn’t for everyone. If you are an investor or a young person with a long-term time horizon, then I recommend staying invested for the long-term. Keep contributing to your retirement funds, 401k, etc. and do not move them to cash.
One of the main reasons I keep a larger than normal cash position during corrective markets is that 4 out of 5 stocks move with the general direction of the market…no matter how great the company. For example, during the financial crisis of 2008, Apple dropped from $200 down to $80, and that was right at the beginning of two of the biggest product launches in history (the iPad and iPhone).
I’ve studied some of the best traders who ever lived, such as Jesse Livermore and Gerald Loeb. They believe that you should only be in the market when probabilities are in your favor, and that the LESS you are in the market, the better.
Don’t get me wrong…I want the market to be healthy. I simply respect and understand that it’s not always going to go up. When it declines, as it has the past few weeks, my goal is to protect client assets and to protect my confidence. As I mentioned earlier, this isn’t the end of the world. This is a correction and it happens from time to time. I don’t know how long it will last, no one does. But one thing I will guarantee is that when this correction is over, the market will have an amazing new uptrend. The key is to have patience and discipline until market conditions improve.
I can be reached at: email@example.com