Should you sell and stay away from an unsustainable market?
Updated: Aug 6, 2021
Transcript of the video
There are times where the market behaves completely illogical and detracts from reality which may cause you to be anxious about what’s going to happen as we move into a more uncertain future and naturally, some of you might give in to the fear and sell off your investments.
In today’s video, let us address the question of whether or not you should sell everything and stay away from a potentially unsustainable market.
My answer to the question is no! You should not sell off your investments completely, but you should take active steps to manage your risks.
Active steps may come in 2 forms, you can either
sell off parts of your investments and keep them in form of cash or
switch part of your riskier investments like equities into less risky investments like bonds
The reason why you would want to do this is to protect your investments from potential price decline as if that happens, only the amount that is invested in the riskier assets will be affected.
Now of course, in an event the prices continue to increase, only the amount invested in the riskier assets will get to enjoy the full upside of the price movement and hence your overall performances will also be lowered.
At the end of the day, whether you should step in to increase or decrease your risk exposure depends on whether you feel that the current market situation is sustainable and that requires you to do your own homework and come out with your own conclusion.
If you feel that the market movements are sustainable, you may be better off investing more or not doing anything.
But if you feel that the market movement is not sustainable, you might want to consider lowering your risk exposure.
Let me give you an example
Back in 1998 when the dot com bubble was forming, a few people were advising against investing and participating in a severely overvalued market.
Now, while the signs were clear to some, most investors didn’t care about whether or not the price movement was sustainable and as a result, the market climbed another 31%
But eventually, the market collapse and prices dropped about 50% in order to go back to their normal levels where it could be supported by proper fundamentals.
The same can be said for the 2008 financial crisis.
The S&P increased by a good 18% before it came crashing down by 57%, all of this happened when there were signs of an unsustainable market forming as early as 2006
So what can we learn from these 2 episode,
1) while nobody can time the market perfectly, there are clear warning signals that investors should not ignore when the markets are reaching the unsustainable territory
2) it is better to miss out on potential returns than to sit through the eventual crash that would happen when markets correct themselves back to normalcy
Back to the question of whether or not you should sell everything and stay away from an unsustainable market, the answer is NO.
You shouldn’t sell off everything because you may miss out on potential gains in the future but that doesn’t mean you shouldn’t manage your risk exposure and take profit from time to time in an unsustainable market.
Doing so will allow you to participate in the profits while managing the potential losses that you may suffer so that eventually when prices correct themselves to normalcy.
Having diamonds hand is important but that is not the solution to all investment problems. You should base your investment decision on logic and facts instead of succumbing to your emotions and herd mentality
If you don’t know how to start investing or maybe you don’t have the time to manage your investments, I would suggest that you engage someone to guide you and manage it on your behalf.
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For the more savvy investors who would like to run some backtesting scenarios to help you make a more informed decision, you can check out the resources available at https://pyinvesting.com/
This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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