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What to Do in a Jittery Market

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After months of moving nearly straight up, stocks have finally seen the rally take a pause. But if you take this opportunity to make huge changes in your investment strategy, then you could cost yourself a huge amount of profit in the future.

Better the top than the bottom
Admittedly, thinking about selling stocks right now makes a lot more sense than selling them back at their lows early last year. Back then, getting out of the market was more a panicked, knee-jerk response to the financial crisis than a measured decision to reduce risk. Selling a year ago essentially locked in big losses and ensured that you'd never make that money back.

Now, though, things are a lot different. With many stocks having doubled or more from their lows, no one can accuse of you of selling low. And having fought so hard to maintain your resolve while your portfolio clawed its way back from the big losses you suffered, you certainly don't want to be overly greedy when perhaps you ought to be fearful.

That's a valid concern. But it doesn't mean you should act on it -- at least not in an extreme way.

Pullbacks happen
Market moves like we've seen over the past couple of years may give you the false impression that stocks always move in a straight line, up or down. Unfortunately, nothing could be further from the truth. And if you sell out of a rally at the first sign of trouble, then you might leave a lot of money on the table.

For instance, go back to last June. In the space of just three months, the S&P 500 had risen by nearly 40%. Many stocks, including Ford Motor (NYSE: F  ) , Las Vegas Sands (NYSE: LVS  ) , and Bank of America (NYSE: BAC  ) , had seen much stronger gains as each started to overcome major threats to the viability of its business.

Then, a downturn started that took the market back down about 7%. Some saw that move as a sign that the good times were over and that bears were reasserting their dominance over stocks. Those who sold their stocks probably believed that they had been fortunate to have held through the financial crisis and reduce their losses -- at least until they saw the further gains they sacrificed:

Stock

Return, March 9, 2009,
to June 12, 2009

Return, June 12, 2009,
to July 8, 2009

Return Since July 8, 2009

Ford Motor

251.1%

(12.4%)

111.0%

Microsoft (Nasdaq: MSFT  )

55.0%

(3.3%)

29.4%

Las Vegas Sands

540.8%

(26.9%)

144.2%

Bank of America

266.3%

(13.6%)

34.2%

Cisco Systems (Nasdaq: CSCO  )

46.2%

(8.9%)

34.4%

General Electric (NYSE: GE  )

82.2%

(20.0%)

52.8%

Google (Nasdaq: GOOG  )

46.0%

(5.3%)

34.4%

Source: Yahoo! Finance. As of Feb. 19.

As you can see, if you let the market's headfake persuade you to sell, you locked in some pretty nice gains from the March lows. But you also missed out on the even bigger gains that followed -- giving up your chance at the kind of returns that most investors rarely see.

All in moderation
Recent experience stresses the benefits of taking a more measured approach to your investing. After your stocks have had strong gains, then it might well make sense to rebalance your portfolio and sell a portion of your holdings, keeping the risk level of your investments in line with your overall investing strategy.

But as long as nothing has changed fundamentally about the companies you invest in, then dumping all your stocks just doesn't make sense. Just because they're no longer trading at bargain-basement prices doesn't mean that they're not still a good investment.

So if you find yourself increasingly nervous when the market stops going up like a bullet, think about your expectations and make sure that you're not being unrealistic. Market downturns are inevitable. But if you choose stocks of companies that can get through tough times -- and have the discipline to hold onto those stocks even when they temporarily lose value -- then you'll see a big difference in your total returns over the long run.

Don't put your investments in jeopardy. Let Fool Tim Hanson show you how to save your portfolio.

Fool contributor Dan Caplinger knows when to hold 'em and knows when to fold 'em. He owns shares of General Electric. Google is a Motley Fool Rule Breakers pick. Ford Motor is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy knows the score.


Read/Post Comments (3) | Recommend This Article (13)

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  • Report this Comment On February 22, 2010, at 6:00 PM, PositiveMojo wrote:

    Yeah - responding to the old market "head-fake" is a real bummer. But not to respond might be even worse.

    There is no doubt there is a ton of uncertainty with the clown show in Washington during the past year. Can you spell "incompetent"?

    Last week the market showed signs of life and many stocks broke up through the moving average. Some even developed a 3 day up trend. But did we just see a bottom? Who knows. Some of techincal indicators seem to be pointing in that direction - but in the words of Dirty Harry - "Do I feel lucky? Well, do ya, punk?"

  • Report this Comment On February 22, 2010, at 6:01 PM, PositiveMojo wrote:

    Yeah - responding to the old market "head-fake" is a real bummer. But not to respond might be even worse.

    There is no doubt there is a ton of uncertainty with the clown show in Washington during the past year. Can you spell "incompetent"?

    Last week the market showed signs of life and many stocks broke up through the moving average. Some even developed a 3 day up trend. But did we just see a bottom? Who knows. Some of techincal indicators seem to be pointing in that direction - but in the words of Dirty Harry - "Do I feel lucky? Well, do ya, punk?"

  • Report this Comment On February 24, 2010, at 6:47 PM, ypcheng wrote:

    Good article...

    If you've done the home work and really believe in a company, when the market is down, it is like buying at a discount. Getting out is the last thing you should be doing. That said, for those bought C and GE at $40, yes, do keep our eyes wide open. For me I am buying stocks that pay dividends. Do your home work.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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