Episode Summary

In today’s episode, we’re going to talk about when is it time to get out of the stock market? This has come up several times in the last couple of weeks so I wanted to give you my thoughts and some things to think about as you navigate through the bear market.

Key Points

  • Selling out of the stock market depends on your money phase
  • Most individual investors typically underperform the stock market
  • When close to retirement, it’s important to ask the right questions, and selling in a bear market is not one of them
  • Owning individual stocks requires a different mindset and different rules so you can protect from loss


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Today on Agile Finance Radio, we’re going to talk about when is it time to get out of the stock market? This has come up several times in the last couple of weeks, so I wanted to give you my thoughts and some things to think about as you navigate through the bear market.


Statistically, I knew the market was due for a correction, and wow, has it delivered. These last couple of weeks have been extremely volatile, and we hit about 30% down. I’ve been in the market for over 25 years, so I’ve seen the DOT Bomb, 08 financial crisis, SARS, Swine flu, Ebola, and more.

I’m no market whiz and don’t have a crystal ball, but looking at the past and understanding those patterns can help prepare us for the future. Yes, I know that past performance does not guarantee future results, but I also know that the market works in cycles, and we should have an awareness of those in relation to our money phase.

Your money phase is where you are in life. Are you planting? Meaning you are in your 20’s and 30’s and working on your career. Or are you a grower, maybe in your 40-50’s and had some success and your looking to keep growing or accelerating your savings and investments. Or maybe you are in or close to the harvesting phase, meaning you will start tapping into your savings and investments and no longer have full-time paid employment.

The important thing is to asses where you are at, and this will help you understand where you should be in the market.

Planting Phase – Stay in the Stock Market

If you are just starting out, and in your 20s and 30s, I wouldn’t be selling. If you plan to work for 15 to 20 years more, then I would be using this as a buying opportunity and accelerating my investment. The market is on sale.

Do you think in three, four, or five years we will be passed this? Or do you think the market is going to zero and all these companies are going out of business?

Emotionally this is tough to sit through, but countless studies from Vanguard, JP Morgan, Dimensional, and others have shown that individuals have consistently underperformed the market but 3-5%.

And at a time like this is exactly why. They panic sell near the bottom because they can’t take it anymore, and then they have no idea when to get back in the market, and they miss out on the majority of the recovery.

You can try to time the market if you wish, but let’s be honest with yourself and track your actual performance to see how you are doing.

Growing Phase – It Depends on the Market and Your Goals

What if you are in your 40s or 50s? Well, I would say it depends. I like to think of these things in regard to your overall financial plan. When do you plan to retire or make work optional? If ten years or more, you probably want to stay in at least some equities to get the growth that you need to endure a 30+ year retirement.

If you are closer to retirement or thinking about early retirement, then a different strategy may need to be in place. The point is, this is when it’s important to start thinking about your diversification and your allocation of funds.

For example, I have one client nearing retirement, about five years away, and before the bear market, they had a mix of stocks and bonds. If you hadn’t noticed, bonds have done really well, and they have done exactly what they are supposed to do. They have no way near a 30% reduction in their principal. This is why it’s important to understand your money phase and have a portfolio that matches your goals in a realistic manner since we know corrections do happen.

Harvesting Phase – Strategy is Key

If you are ready to retire or in retirement, it requires a different mindset. You shouldn’t be asking the question if you need to sell during a bear market. Your strategy for generating an income should have already set you up so that you have an income plan for 1, 2, and 3 years out.

There are many strategies on how to generate income, and I know some advisors take an all-in approach to the market and just sell when necessary. While that can work, I find most individuals can’t tolerate that psychological effect of watching their portfolio shrink when it comes to markets like this.

I like to take an individual approach and craft a portfolio that makes sense for the money phase you are in as well as the type of person you are. We can find the middle ground so you can sleep at night.

Stock Pickers Plan

If you are a stock picker and own individual stocks, you should have either been taking action, or you are watching those with great intensity. You do not want to let a gain turn into a loss. If you have a bigger profit cushion, maybe 30% or more, then you might be able to ride this out if you think the stock is sound. If you don’t have a selling plan, then you shouldn’t own individual stocks. Period!

So why do I say that? If you own individual stocks, you are taking on additional risk unless you are operating as a mutual fund and have less than 3-5% of your portfolio in an individual stock. But who in the world can manage that as an individual investor? Can you really keep up with 30 or more stocks?

When I think about owning stocks, I’m talking about 4-6 stocks in a $100K portfolio. So, I may have an initial investment of 20K in one stock. That’s a lot of money, and I don’t want to lose it. If I’ve done my research and have a fundamentally excellent stock with good technical indicators, I’m willing to make that trade. I have no guarantee that the trade will work, but I don’t have to be right all the time if I protect against the loss.

How to protect

If you think buying a stock is hard, try selling it. Most individual investors don’t have sell rules, and that’s why study after study shows individuals will underperform the market averages. They get emotionally attached to the stock and won’t make rational decisions when it turns into a loss. They start hoping and wishing for it to come back.

Let’s say you buy a stock and put $10,000 into it, and after a few days it goes down 5%. Your balance is now at $9,500. That’s not bad and is normal for stocks to fluctuate. To get back to 10K you have to make 5.26% (9,500 x 5.26% = 10,000). Not bad either. But what happens if your stock keeps falling?

What about a 25% loss? You’ll need a 33% return to get back to even. If you let a loss go down to 50%, you have to hope it goes up 100% from that point just to get back to even. How many of your stocks have you gotten a double in lately? This is catastrophic and why you must get out of a losing stock.

I typically hold stocks for a few months to a couple of years. Just like the overall market, individual stocks have cycles as well, and nothing goes up forever. If you only let your loss get to 5-8%, then you can easily recover and trade for another day. Don’t argue with the market! It’s not you, it’s just that trade didn’t work out that time.

If you keep getting losses, like four or five in a row, that should tell you something. Either the market is going down or volatile, or your system doesn’t work. Do a post-analysis of your buys and sells and see what’s going on. Sometimes you have to be patient with the market and wait on the sidelines.

I’ve found that if I determine where I’ll exit a stock and how much I’m willing to lose before I buy it, then that takes the emotion out of owning a stock. Most brokerages have trading triggers or stops that you can set to get out of a stock based on a price level that you determine. If you can’t watch the market, then these are a must.

Sell Rules

There are many viewpoints and situations that warrant selling a stock. Here are a few of the rules that I follow to help in my decision-making process once I’m faced with a falling stock price.

  • Amount of Loss: Has it reached what I’m willing to lose? Typically this is 5%-8% of the initial investment.
  • Has it reached 25% or more gain? I typically will sell some or all when I have a decent gain. Not every stock goes on to be a big winner
  • How close are you to theĀ earnings report? If earnings are due and there isn’t a profit of more than 7-10%, I may trim the position.
  • Stock gaps down on huge (abnormal) volume, I probably will sell depending on the overall market.

Owning individual stocks requires much more discipline, rules, and time than investing in funds. Some people just like the hunt, and some may be better at it than others. Just track your performance and see how you are actually doing. Most people only have the tendency to remember their winners.

Final Thoughts

I don’t know your individual situation, so don’t take these as recommendations. You can use these as a guide on how to think about your finances and meet with an advisor that’s a good match for you. If you have an advisor, I hope they have reached out to you during this time.

If you want a second opinion or would like to have a quick strategy call with me at no obligation, head on over to agile finance radio.com and select the work with me option.

That does it for this episode of Agile Finance Radio. Tune in next time as we discover more ways to win with money, gain at life, and ultimately retire with confidence.