Investing

Let's say I cashed out on Feb 18th and I'm sitting on $500K cash, why is this a "dumb" idea?

  • Last Updated:
  • Feb 29th, 2020 8:53 pm
[OP]
Member
Jun 10, 2015
227 posts
84 upvotes
Canada

Let's say I cashed out on Feb 18th and I'm sitting on $500K cash, why is this a "dumb" idea?

I am a novice investor who is in his early 30s. I cashed out on Feb 18th and missed out on the steep declines this week. I currently have around $500K cash. My reason for cashing out is that I think the valuations are too high.

Many people have ridiculed decisions like this one. That said, most would admit that markets will decline by another 10 percentage points as the Coronavirus becomes more widespread.

Why is it dumb to sit and wait with cash?
39 replies
Deal Addict
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Dec 4, 2007
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good for you, now me and alot of other investor have to wait for the market to recover....someday.
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Dec 31, 2018
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Last night I went to the casino and won. Tell me why it was a dumb idea to risk my money.
Newbie
Jul 8, 2018
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waiting for what? what your entry point?
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TrickleDownEconomics wrote: Last night I went to the casino and won. Tell me why it was a dumb idea to risk my money.
He preserved capital by losing potential upside, but also any potential downside. That's different from going to the casino because he has nothing at risk to lose. The only uncertainty now is when to get back into the market, but also remembering to reserve cash for taxes at year end.

Preservation of capital vs risking capital.

Whatever investment plan/decision is only revealed to be smart after enough time has elapsed.
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:
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Mar 24, 2008
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Nothing wrong with it OP, why do you think anyone else cares how you invest your money?
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Sr. Member
Nov 24, 2016
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Because it's literally impossible to time the market. Taking your money out and missing out on certain events blows both ways. You miss on the upside and the downside. It's gambling. If you bought in when you thought the p/e was high, then you shouldn't have bought. Why did you buy? If you bought at a low p/e and wanted to lock in gains, you might lose out when the market recovers and you're caught with your pants down wondering if it's the right time to get back in. There is literally NO WAY that you can consistently time the market. Much smarter people than you and I can't do it.

Pick a strategy, buy and add more when the markets crash. Rinse and repeat.

I personally only buy income producing stocks. The more the markets fall the more I buy. Don't give a toss what the market value of my stocks are. I think I've lost a BMW's worth on paper over the span of a couple of days. Who cares? It'll be back up again eventually. And if it doesn't then so be it. The income is there.

In conclusion: what you just did can't be repeated. I sold my condo in 2017 at all time highs in Vancouver because I needed the funds. Everybody called me lucky/smart. Meanwhile prices have started to recover already. Sell only if you absolutely have to or the fundamentals have gone tits up. Otherwise it's a losing game.
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Sep 8, 2007
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Way Out of GTA
Great trade OP. Many people wish they would have done similarly. The market, (but mostly tech & Tesla type stocks) were making the market heavily overvalued. A massive company like Apple doubled last year. The S&P500 return was heavily influenced last year by tech stocks. These tech stocks really haven’t even come back down to earth. They are still far from it.

And why if dipping your toe back into buying high quality traditional dividend names with already historically attractive valuations are a good way to go. Look for some containment to start occurring and just set your level and price points however low they might be. If you buy now, you are buying because you have a longer term window and have to be ok with the volatility.
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Oct 21, 2016
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redflagdealsnewb wrote: I am a novice investor who is in his early 30s. I cashed out on Feb 18th and missed out on the steep declines this week. I currently have around $500K cash. My reason for cashing out is that I think the valuations are too high.

Many people have ridiculed decisions like this one. That said, most would admit that markets will decline by another 10 percentage points as the Coronavirus becomes more widespread.

Why is it dumb to sit and wait with cash?
If this virus concerns didn't arise you would have been ridiculed . Good luck I guess
Jr. Member
Nov 25, 2017
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MashGhasem wrote: Because it's literally impossible to time the market. Taking your money out and missing out on certain events blows both ways. You miss on the upside and the downside. It's gambling. If you bought in when you thought the p/e was high, then you shouldn't have bought. Why did you buy? If you bought at a low p/e and wanted to lock in gains, you might lose out when the market recovers and you're caught with your pants down wondering if it's the right time to get back in. There is literally NO WAY that you can consistently time the market. Much smarter people than you and I can't do it.

Pick a strategy, buy and add more when the markets crash. Rinse and repeat.

I personally only buy income producing stocks. The more the markets fall the more I buy. Don't give a toss what the market value of my stocks are. I think I've lost a BMW's worth on paper over the span of a couple of days. Who cares? It'll be back up again eventually. And if it doesn't then so be it. The income is there.

In conclusion: what you just did can't be repeated. I sold my condo in 2017 at all time highs in Vancouver because I needed the funds. Everybody called me lucky/smart. Meanwhile prices have started to recover already. Sell only if you absolutely have to or the fundamentals have gone tits up. Otherwise it's a losing game.
This is wrong. People are able to use mathematics to deduce near-optimal times to enter and exit based on the historical volatility of said stock or index, and the allocation of portfolio to said stock or index. Avoiding the 10 worst days of the market will do more to preserve your capital than losing out the 10 best days of the market. In the long term, the results are very significant. Even simple rules like daily moving averages and crossovers are significant.

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There are even third-party tools out there that can do that for you, not that I endorse them specifically.

https://tradestops.com/

You can miss out on some gains or enter mid-way to exit prematurely, but avoiding the -50 to -90% decliines will be that main difference which will determine whether you can meet your retirement needs in 20 years or less.

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This will never change. You want to be the dude that sold at the peak with high P/E and/or CAPE ratios, because time in the market is less in your favour. Especially years with +20-50% gains for one or two consecutive times, not preceding a bear market. Market sentiment can go up and down but if you look at the real long-term economic factors with any events (trade-wars, sovereign crisis, Iranian missiles, NK threats, China debt) you can see whether the event is isolated or will spread, whether the actors best interests are to pose or stake a claim or to actually follow through with action and induce damage. 9 times out of 10, the event is nothing to worry about, but multiple aligning signals of outlooks that are likely to signal persistent lasting effects would mean prudence for re-allocation at least for a period of 3 months to 1 year.

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Wealthy people are not idiots.
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Meaning, if they got out on Monday or Tuesday or even before that, chances are the remaining people will be bagholders. Even if there was a bounce up in the next two weeks, like poker, they can always increase their positions marginally (10-20%) at a time until market confidence resumes, thus annulling any damage done to their portfolios and locking in their gains.

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200-Day MA shift into bonds.
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Underperformance happens after a recession has finished (waiting until 2009), but avoiding the bottom is significant.
Almost all high-gain days precede high volatility high-sell off days.
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"In 1988, Bob was 35 years old, had saved up a $100,000 nest egg and decided to invest it in the S&P 500 index. He added $625/month to the index every month and never touched it. When Bob retires at 65, he wants to maintain his current $75,000 lifestyle. We will assume he can generate 3% a year in retirement on his nest egg.

The chart below shows the difference between two identical accounts. Each started at $100,000, each had $625/month in additions and both were adjusted for inflation and total returns. The purple line shows the amount of money required, inflation-adjusted, to provide a $75,000 per year income to Bob at a 3% yield. The only difference between the two accounts is that one went to “cash” when the S&P 500 broke the 12-month moving average in order to avoid major losses of capital."

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Last edited by Yindare on Feb 29th, 2020 8:09 am, edited 4 times in total.
Member
Dec 13, 2005
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Wait hol up. That "math of loss" graph shows heads I win trails you lose. If anything it shows that missing best or worst 10 days has a pretty similar magnitude effect from a do nothing approach.

What does the graph look like if you miss both the up and down days? Show me your backtest on the simple moving average crossover signals. Looks to me like a commercial post to sell software.
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Mar 24, 2008
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Yindare, you must be a billionaire since you know how to time the market. Am I right?
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Deal Addict
Oct 23, 2017
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redflagdealsnewb wrote: I am a novice investor who is in his early 30s. I cashed out on Feb 18th and missed out on the steep declines this week. I currently have around $500K cash. My reason for cashing out is that I think the valuations are too high.

Many people have ridiculed decisions like this one. That said, most would admit that markets will decline by another 10 percentage points as the Coronavirus becomes more widespread.

Why is it dumb to sit and wait with cash?
You got lucky, don't depend on luck again. Reminds me of the last time I did something like that a very long time ago and sat on cash. Worse thing I ever did because I could never decide when to get back in and lost the next upswing. Timing the market is a fool's game. If you wait for that further 10% drop you will be kicking yourself in the ass if stocks start to recover. "Most will admit" means that nobody knows!

There are technical investors who buy/sell based on ratios and valuations. As a novice you lack the knowledge, emotions, and discipline to execute such a strategy.

But if you are going to play roulette, hedge your bets and don't commit all of your assets when you make these moves.
Deal Expert
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Aug 2, 2010
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You gambled once and it turned out to be a good decision for the very short term, ie 10 days. What's your point? Long term you can't time the market because you'd have to be right so many times and you simply won't.
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Jun 19, 2009
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Do you really need to ask thread on why cashing out before a big drop wasn't a "dumb decision"? Really?
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Be careful of "resulting" - using the outcome to determine whether or not a good decision was made.

If I smoke a cigarette while pumping my gas but don't blow myself up, is that a good decision?
Buy quality. Keep calm and go long
Deal Guru
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Nov 19, 2002
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There are billions of great decisions... in retrospect. Asking people to examine a past event to determine whether or not it was a "good idea" is meaningless. What's your NEXT event?
Banned
Mar 11, 2016
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that worked well for OP...I would wait....we were at worldwide market highs after 10 years of growth...we were DUE for a good correction on a normal day...throw in Coronavirus and anyone who thinks we are done is delusional...I note news on Friday cancellation of many international significant events that are good indicators to me of worldwide fear yet to come...when you see the Geneva Auto Show being cancelled that is a huge alarm bell along with many other events...next will be the Olympics??...these that have never occurred due to this kind of circumstances...market timing, math and stats are not going to assist you in the short term...
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Oct 21, 2014
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redflagdealsnewb wrote: I am a novice investor who is in his early 30s. I cashed out on Feb 18th and missed out on the steep declines this week. I currently have around $500K cash. My reason for cashing out is that I think the valuations are too high.

Many people have ridiculed decisions like this one. That said, most would admit that markets will decline by another 10 percentage points as the Coronavirus becomes more widespread.

Why is it dumb to sit and wait with cash?
So, did you actually do this or is this a hypothetical? The Coronavirus is an emergent phenomenon with no parallel in modern era. It could cause a lot of damage or it might begin to peter out as the treatment Gilead is currently trialing starts to be given to patients or as we move in to warmer weather. It might also cause more damage and we might be a few more months before the damage is contained and we start to restart economies.

Your hypothetical person would have gotten a good result thus far, but just because you got a good result doesn't make it a good process. Some thoughts:

1) Some of us who are doing this for a long time most of our portfolio value is gains. Selling and rebuying down 10% creates a taxable event which can negate any savings we would have made if held in a taxable account. I started a long time before TFSA and my portfolio doesn't fit in our TFSAs by a long shot.
2) No one knows for sure what will happen with the market next week. If everyone "knew" that the market would drop 10% next week, it would have yesterday.
3) Risk on/risk off strategies are notoriously hard to time. You have to get both the exit and re-entry correct.
4) What methodology do you use to choose when you'll panic sell? Did you panic during December 2018? If so, when do you buy back? How about during the North Korea nuclear crisis. Would you panic then? There is always a reason to go to cash. Give me any day and I can give you a reason, but you can also go the opposite way. A chunk of the wealth I have now comes from buying Royal Bank stock during the 2008 crisis and never selling a single share. If you had asked the average investor at the time about what they thought about what I was doing they would have said I'd lost my mind. Perhaps I saw something at the time they didn't.

Personally, I've been a buyer of stocks every year for twenty five years, and I can count on one hand the amount of times I've actually sold a stock. My net worth is the highest it's ever been this year and the dividend cashflow from investing has given me opportunities to provide for my family in ways that a job never could have.

Remember that this is a game of process and long term gain. You might save some money selling or you might lose some. I've done my best by staying the course, buying when cheap and reinvesting dividends when I can.

I'll go on record and say I bought HON, BAM.A, VFV and TD this week while not selling a thing.
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What's done is done. Be happy with your decision!
I believe it is a mistake to judge the quality of a decision solely by its outcome. Good decisions (i.e. lumpsum investing) can have "bad" outcomes and bad decisions can have good outcomes simply because of luck— Germack

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