Stock market futures indicate Dow jones industrial average will open down another 600 points. This in addition to the recent declines.
What should investors do in the midst of a market decline? Conventional wisdom says sit tight. Stocks always come back.
I suggest people sell some fraction of their stocks and risky assets. For example, you could sell 10% of your stock holdings two hours from now. The current futures price suggests markets will open down 3-4%. This puts the market down less than 15% from all-time highs.
What would an investor do next? Buy back the sold stock if the market makes a new high. The loss from this trade would be 10% times 15% for a total of 1.5% of the amount invested in stocks. Painful, but manageable.
The psychological value of selling today is that it unfreezes you, and prepares for more sales. The sky may be falling.
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| Chicken Little is Powerless Against Central Bank Money Printing |
Postscript July 2016
The Dow Jones Industrial Average made a new all-time high in July of 2016, 14 months after its previous high in May of 2015.
Chicken Little never bets against markets at new all-time highs; according, when the new high was made in July 2016, Chicken Little bought US stocks to cover a short position, and, in addition, bought more US stocks to establish a tiny long position.
Read July 2016 post "Chicken Little Buys US stocks."
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