People ask me quite often if the bull market we have had this year will continue or if we will soon have a correction. I tell them I Don’t Know, but I don’t see a catalyst that would cause a correction. Especially a correction that happened 30 years ago, in October 1987, or the dot-com bubble burst in the early 2000’s, or the Financial Crisis crash of 2008. Then again, who foresees a correction coming until it actually happens?
Many investors who have had money invested in the stock market have seen their account values rise for the past year, and for the past several years. This gives rise to the concept of “House Money”. Even if you haven’t heard that concept expressed as such before, most people know exactly what it means: Profits. Picture yourself sitting at a Blackjack table in Las Vegas, and you have had a good run. You are looking at a pile of chips larger than the pile with which you started. The difference between your current, larger pile of chips and your starting pile is House Money.
Take Chips Off the Table
What should you do with your winnings? You know your run of good cards has probably been lucky or at least unlikely to continue (otherwise, casinos wouldn’t exist!). Should you “let it ride” and continue to play with your now-larger pile of chips? Or should you “take chips off the table”, meaning go and cash in some of your chips at the window? It’s Vegas, after all, and you have probably also had a couple of cocktails, so perhaps your judgment is impaired. In this situation, most card players will let it ride. It takes a lot of discipline to take chips off the table.
What Should I Do Now?
Vegas is one thing – the objective is to have fun and to experiment with the effect of cocktails on decision-making. After all, you are in Vegas with money you can afford to lose, right? Investing is a different animal. Sober decision-making is needed. This is your nest egg, your retirement money, that you can’t afford to lose (although you should think about how much you can afford to absorb during an ordinary downturn). If you are In The Black now, should you take some chips off the table? My advice to you is that you should if it helps you sleep better at night. However, the trick is to balance your ability to sleep at night with the regret you might have if the market continues to go up after you take those chips off the table. It also depends on where you are in your lifecycle. If you are closer to retirement, it makes more sense to take chips off the table. If you are younger and have many more years to work, then Let It Ride (as Bachman-Turner Overdrive said). Watch it here:
A lot of us who were in the market in 1987, 2001, and 2008 remain scarred by those experiences. We are convinced that because it happened back then, it will happen again. A major correction probably will happen again, but we have pulled out of every past correction and gone on to make new record highs. We are near a record high in the major indexes as I write this. Gloom-and-doomers in the media are always out there. Have confidence in your own ideas and research, and make sure you have a good financial advisor to help you. I know how to contact one.
In a future blog, I will discuss what to do with any money that you do in fact take off the table. I offer some advice that may be counterintuitive and may be different than advice offered by my financial planning brethren. Please stay tuned!