What Are We Going To Do About This Market?

By Brad Thomason, CPA


If you have invested money in the US stock market at some point in the last couple of years you are likely in that happy place where you find yourself saying something along the lines of, “Wow, that actually worked!”  But now that you are in possession of a nice gain, whacha gonna do about it?

If you have read my blogs for some time you may think that I am anti stock market.  I’m really not.  I do not fail to realize that the market is capable of creating new wealth at a rapid pace when everything goes right.  And I’m glad that stock investors have gotten this recent gain.

The problems that I have with the stock market are really problems that I have with the way the average retail investor interacts with the stock market.  First, I see case after case of people being over-concentrated in this particular asset class (often because they do not realize that there really are some other choices out there).  As a portfolio designer, I simply don’t like over-allocation, in any of its forms; stock market or otherwise.

Second, I find that individuals tend to be somewhat at a loss for what to do when the market makes a dramatic move, up or down.  In the up case, as we have right now, only a minority of investors seem to have a plan about what they are going to do with their new capital.  Most do nothing, and in so doing “give back” a lot of gain when the market eventually reverses.

Am I saying that doing nothing is a bad thing?  Not necessarily.  But I am saying that if you do nothing it ought to be because you chose to do nothing, and not because you froze in the headlights.

If your analysis indicates to you that the run is more likely than not to continue and you want to hang around for more, that’s your choice.  I’m just suggesting that you actually make it a choice.  One that you come to after thinking it through.  One that you make after considering the possibility of booking your gain, or at least re-balancing your portfolio to put the stock piece back in proper proportion to the rest of your asset-class-level holdings.

My preferred approach to investing is don’t-get-in-without-a-plan-for-getting-out.  Not just stocks; doesn’t matter what the underlying asset is.  I know that not everyone follows that notion.  And I guess that’s OK.  But even if you don’t have the plan going in, I don’t think any harm comes from reassessing the situation once you are in the moment.  There is a risk that if you get out too soon there will be dollars you could have made that you didn’t.  There is also a risk that if you don’t get out then your paper gain is going to vanish before you have a chance to make it a real one.  Those risks are always present after an uptick, so to some extent this is always the decision facing long-side investors.  It’s just that the decision becomes ever-more-important as the uptick continues: the bigger the gain the more there might be to lose for a wrong choice.

Look, I think it is fair to say that this last uptick has been a dandy by just about anyone’s measure.  So hooray.  More money is better than less money.

But what are you going to do about it? And is it going to be because you took a purposeful action, or because you ignored the decision and ended up with whatever fate threw your way?



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