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US Stocks Decline: Time To Sell?

 April 12, 2012 08:56 AM

Whenever markets pull back for a few days, fear sets in.  You see plenty of stories about how to protect your portfolio, what stocks will fare the best in a decline, and a parade of pundits explaining what is going wrong.

In an election year, it is even worse.

If you are in the market, what should you do?  It depends.....

Are you a trader or an investor?

Barry Ritholtz has a great article on this theme, emphasizing the importance of time frame and having discipline geared to your objectives.  He includes a number of specific and helpful rules.

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Readers of "A Dash" know that I endorse this distinction, making it carefully  in my weekly WTWA articles.  Despite this, and just as Barry mentions, people wonder why my recommendations may diverge from my market commentary.  Since I am managing five different investment programs, geared to different investor needs, the right move depends upon the program objective and the time frame.

As Barry notes, investors should not try to "play the squiggles" based upon their preferred concept of long-term valuation.  This is consistent with my recent article showing that none of the big-time pundits is very good at market timing, if you look at actual results.

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Traders versus Investors

There are sharp distinctions right now, with differing conclusions.  Here are some of the key topics:

The Fed and QE 3

Steve Liesman today offered this analogy.  Suppose your doctor gave you a clean bill of health.  Alternatively, suppose your doctor said that you were really sick, but he had a prescription for you.  Which would you prefer?

For traders, the analogy breaks down because they are all smarter than the Fed.  They know that the economy is in dire shape whether the Fed realizes it or not.  For them it is all about more QE, since they have become convinced that central bank money printing flows directly into stocks.  It is a simple focus on Fed policy.

Investors do better to stick with traditional economic policy and forecasts.

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