Should I Sell Everything?

A CNN Money reader recently wrote into Walter Updegrave and asked whether she should sell all her stocks and move into safe investments. After the 4.5%+ drop in the market today after Geitner’s remarks, she probably would’ve done well to follow her instincts and not Updegrave’s advice! While that would’ve been great in the short term, selling now and trying to time when to re-enter is a fool’s errand you’re like to fail at. Fortunately, Updegrave agrees.

He argues that selling today and “waiting it out” is a problem because you don’t know when things will recover. He cites recent market moves as clear
proof that you should try to time the market:

In early October, 2007, the Dow Jones Industrial Average hit a peak close of 14,164.53. Then the you-know-what hit the you-know-what. The Dow began falling, eventually dropping 17% by the beginning of March, 2008.

But then the market began to dramatically improve. By early April, 2008, the Dow had rebounded almost 5%. And by early May it was up 11% from where it had been just two months earlier.

If you had pulled out of the market in late 2007 or early 2008, you might very well have seen the rally in the spring of 2008 — a double-digit gain in less than two months — as a signal to get back in. It looked like stocks were back.

But with the benefit of 20/20 hindsight, we now know that this rebound fizzled, and stocks dropped again. The Dow plummeted 42% between May and late November, 2008.

Ah, but the Dow then rebounded by 20% from November, 2008 to early January, 2009. Sign of the big turnaround? Apparently not. By the end of January, the Dow had slumped 11%.

The market headfaked not once, not twice, but three times! There’s no way to predict it… so don’t bother.