I am an investor with a long term outlook. In theory, I will not need my Roth IRA until I retire which could be twenty years away or more. With that long of an outlook, should I worry about the market direction right now? Many may say no, but I want to protect my capital.
There is always risk in investing, but right now, the market is suffering from something much worse, uncertainty. Risk is generally quantifiable, but uncertainty is not. Uncertainty can shake the market at its foundation and lead to unbelievable moves.
On the S&P 500 bar chart below, you can see a trend line that dates back from the low on August 13
th, 2004. You can further see that the trend line was tested on July 18
th, 2006. On July 16
th and October 10
th, 2007, the S&P 500 peaked at over 18% above this trend line.
(Source: BigCharts.com - click for a larger picture)Today, for the first time in almost three and a half years, the index has closed below this trend line.
I am not a pure technician, but I do look at charts. This break of a long term trend line appears significant to me. Looking at a long term chart, it is feasible that the index could drop to 1,160, or even (gasp) 800.
I am not predicting this, but, at this point, I think we need to be prepared for anything. I personally think there is a lot of panic, misunderstanding and hype out there whether or not we are in a recession. The reality is, these factors, whether legitimate or not, will affect the markets. Perhaps for a long time.
I have previously raised cash and sold some more speculative positions. Now I am considering making the portfolio even leaner. I may raise my cash level from about 6% currently to 15-20%. Why would I not sell everything? Because this is a retirement portfolio with a long term outlook. I have spent years building positions and in many cases I am way ahead in certain holdings.
I will not do anything drastic, nor immediately. I am not panicking. I am considering prudence. Should a long bear market occur, I want to have more cash available to buy stocks cheaper. I also want to protect current gains.
