As logical as that strategy sounds, it is fraught with peril for most investors.
There are several problems with “playing it safe” by cashing out and you may, in fact, create additional risks in doing so.
The first problem is knowing for sure that the market is turning bearish and not just in a temporary bad mood. A prolonged downturn doesn’t announce itself with great clarity.
If You’re Wrong
If you are wrong and the market shakes the blues and rebounds, you’ll be stuck on the sidelines buying back in to rising prices.You sold because prices were dropping and now you’re buying back in to rising prices. This is not a formula for success.
The second problem is, even if you are correct that the market is serious about the downturn, timing the rebound can be tricky. There will be many false starts before the market begins its recovery in earnest.
History shows most of the gains coming out of a down market happen in the first 12 months. What if you miss six of those 12 months?
Defensive Moves
If you are a number of years away from needing the money out of your stock investments, your best bet may be to ride out the storm or consider shifting some of your assets into defensive stocks.Defensive stocks include those industries that weather economic downturns well, such as utilities, drug makers, food and grocery companies, and so on.
If you are nearing a time, you will need the money and are afraid that you may have to sell in a down market, your choices are more limited. Defensive stocks are also worth considering for near retirees.
This is one of the reasons it is important to begin shifting assets out of stocks and into fixed income securities as your time frame shortens for retirement.
