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More discussion from my friends at the Senior Center:
A number of my friends were talking at the local Senior Center where I hang out. A few of them said they sold most or all of their stock market investments last week and have gone to cash. (Money market funds inside their accounts). They are convinced the stock and bond market is too high and they want to get out before the crash. Their plan is to be all cash and wait for the correction or bear market to bottom and then reinvest.
I asked them how they would know when the bottom was and time to go back in. They said they could tell using technical analysis. The rest of the gang thought that sounded like a great idea and they are now planning to cash out of the stock market for now too. (And get in again at the bottom.) I asked them how did they know the stock market was not going to go up for the next couple of years and they said they had been reading all the articles online about how expensive the market was and they agreed. Their plan was similar to someone cashing out of the stock market in mid 2007, going to cash and then going back in in April 2009 when the stock market bottomed.
Anyone here with the same plan? (Sell now and go to cash and then go back in in a few years when after the next stock market crash ends.)
Not a bad plan - I've been conservative over past 2 years but I'll be ready (unlike many) when the market finally starts to correct.
I'm not sure they will be able to use technical analysis to find the bottom, however. But at least they will be able to buy back in when stocks are at more reasonable levels.
I told them that a number of people bought stocks in late 2008 after the market had fallen 25% because they thought the stocks were on sale. After they bought the stocks they fell another 30-40% and then they freaked out and sold them shortly before the stock market bottomed out in March/April 2009. In a sense, they bought a falling knife.
These gang told me that would not happen to them because they would use technical analysis to find the bottom.
As soon as they sell their stock they have to pay taxes on the capital gains. So the market needs to correct by more than that, else when they invest again they'll be starting out from a lower capital base.
Good luck! My Dad cashed out at the bottom in 2008 and he worked on the NYSE. I advised him to just leave it alone many times he would jump in and out. He can't handle the volatility. He is now pretty much broke because of these decisions. It really is sad...but I did learn up close and personal from his mistakes.
Trying to sell at the highs and buy at the lows is much easier said then done. Letting stocks ride and adding to your position at a "low" is much easier. Look at a 1 year chart, was the stock trending up hit $50 a share and is now at $40? Is the RSI below the 30 mark? If so it might be a good time to add to a position assuming the company is still healthy overall. It could definitely go lower, just like a pair of jeans you bought today for 10% off, might be 15% off tomorrow.. you still got them on sale.
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