Reader Question: Making Losses Permanent?

The emails from investors, who have held on to their long positions during this bear market, keep coming in. Here’s what reader Dave had to say:

I am 73 and still working. Against all advice, I remained 80% in stocks because I felt I had such a long way to go to be able to afford to retire, and was willing to risk it, since things were going so well.

Now I have lost over 1/3 of my 401k and personal nest egg. With each new rise in the market, I am encouraged to ride it out. With each dip, I think maybe I should put everything into a money market fund and wait it out. But the thought of making my paper losses permanent when, who knows, Obama and his crew may be able to get the economy on track, has me totally immobilized.

I would appreciate having your view of my situation.

Dave’s story pretty much reflects the view of many who have written in on this topic. I have talked about this before, but it’s worth repeating.

First, be aware that there is no perfect solution to get you out of this mess, but strictly hoping and relying on Obama to come up with some magic trick to not only get the market back on track, but do so quickly, is something I would not want to rely on.

Maybe he will, maybe he won’t, but in the meantime you can implement one idea that might calm you down emotionally and prepare you do better deal with the continued volatility and false rallies:

Sell 50% of your invested holdings and put a 5% sell stop under the balance.

This simple idea will limit further losses, should the market head south again (and there’s a good chance of that) or, if a major trend resumes, you will participate with 50% of your positions. As I said, it’s not a perfect plan, but it’s better than no plan at all.

Look at the worst scenario. If the November lows get taken out, and the S&P; 500 heads towards 600, as some forecasters think, you’ll be glad to have sidestepped further severe losses.

If, on the other hand, a new bull market materializes, you will already be on board with half of your assets and can easily re-invest the other half, once our Trend Tracking Index (TTI) signals a new Buy.

If you think about this, you will realize that most of your discomfort comes from the fact that you are like a rudderless ship drifting in the ocean. Adopting a plan, such as I suggest, may provide you with the life raft you’ve been looking for.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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