As spring finally arrives throughout the country, you would think the stock market would celebrate, but not this year. The indexes were slammed again this week and we can expect more of the same in the months ahead.
By now, if you have been following my advice, you have already raised some cash by selling your most aggressive equity holdings. How much cash you hold is up to you. However, before you sell more, remember, that this sell-off is only a temporary state of affairs. By the fall, you want to be fully invested once again.
In the meantime, don’t expect the stock market to simply drop like a stone. What I expect is a series of lower highs and lower lows. That process is beginning to unfold right now. So far this week, we have about a 3% decline in the S&P 500 Index. The tech-heavy NASDAQ has had a far greater decline, dropping that much in a day.
Momentum and biotech stocks have been the name of the game since the beginning of the year. While the overall markets simply vacillated up and down over the last three months, those stocks were winners with some names gaining 30-50%. Most of those companies are traded on the NASDAQ. Now that the markets are pulling back, it is those same stocks which are leading us lower.
When I first warned investors of a coming sell-off, I mentioned the over-heated initial public offering market (IPO) as one clear early-warning sign that the markets had risk. I noticed that this week, which was billed as the busiest public offering week since 2007, actually flopped. Only three out of seven new companies actually made it to market, while the others postponed due to market conditions.
By now, most of my readers (and clients) have become accustomed to volatile markets. Many of you lived through the devastating declines in 2008-2009. We endured together several major declines together since then. We suffered through periods when the markets were going up and down 1% or more per day, so what we face this spring and summer should be small potatoes to you.
Those trials and tribulations have seasoned you. As veteran investors, you can live through this decline. You realize that this too shall pass. The key in the months ahead is to maintain your composure, resist making emotional decisions and, if you still have not raised some cash, I want you to do so as the market once again climbs to (and possibly breaks) the old highs.
My suggestions would be to sell small or mid-cap stocks or funds. Large cap growth funds are also a good idea, but resist the urge to just sell everything. Markets can be a quirky lot. The past has taught us that stocks can turn on a dime and if you don’t have skin in the game when they turn, you stand to lose quite a bit.
Sure, I’m looking for a 10-15% decline, but what if stocks reverse and go higher before that? In October, 2011, the stock market gained 9% in just seven business days. By the time some investors got the courage to get back in the markets had erased almost half their decline. That’s why you play the percentages when investing.