Good reasons to sell your stocks after a market decline

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Every time the stock market falls off a cliff (which happens more often than most people think), I write an obligatory article urging investors not to panic — and certainly not to sell. I quote authorities who say: "The market always bounces back, and someday you'll regret selling — and even regret not buying when prices were so low."

Well, I'm here to tell you when you should consider selling after a market decline.

1. Clearly, when you don't have enough cash or cash equivalents (like short-term CDs). If your source of income is not secure, and you have lots of debt (like a big mortgage), you may be well advised to add to your emergency money. (Six-months' worth of income is standard.) It's better to sell a little now, to raise your cash cushion, rather than waiting — when you may be forced to sell at even lower prices.

I don't believe that the market will plunge, but it might. As Benjamin Graham said, "The future is uncertain." (A truism that we investors tend to forget.)

And it was Lord Keynes who said that the stock market "can remain irrational longer than we can remain solvent."

2. Another reason to sell: when you have a big loser in a taxable account. Sell it for the tax deduction, and consider using the proceeds to buy another stock or stock fund, to maintain your target asset allocation --- what percentages you have in stocks, bonds, and cash.

3. Still another reason to sell, even if you don't have a big loss: if you believe that you know of a better investment. This is an especially good time to dump any dogs you own because, by selling, you probably won't be subject to huge capital-gains taxes. Or just sell anything you own that you think may be way overpriced.

Of course, it's always a good idea to sell a mediocre stock for a better stock, but it's easier to do this when you won't be whacked with huge capital-gains taxes just for improving your portfolio.

One money manager who is somewhat dubious about the market is Charles Colson, CFA, who runs Horizon Investment Services in Hammond, Ind. He has 25% of his stock portfolios in cash. He writes: "To be sure, we are still seeing attractive stocks — which is why we are still 75% in the market. As for stocks, we think there is a major shift occurring toward quality, large-cap, dividend-paying stocks. Those stocks should hold up much better going forward and should outperform the overall market over the next 12 months."

Comments from others:

Aldo S. Vultaggio, CFA, American Economic Planning Group, Watchung: "The advice I would give is not to panic. The recent market correction was pretty much expected, and is typical after a significant market rebound off a recession bottom. If anything, this is an opportunity to rebalance, and not to get completely out of the market. Corrections are temporary.

‘While the headlines from Europe are creating fear and uncertainty in the markets, and sovereign debt problems could get worse before they are fixed, most if not all economic data indicate that we're in the process of a gradual global economic recovery."

Eve Kaplan, CFP, Kaplan Financial Advisors, Berkeley Heights: "I hate to be so predictable and bland, but predictable and bland often do better than market-timing, so here goes:

"Stay within your target range at the asset-class level. For example, if you're 60% stocks, 30% bonds, and 10% cash, rebalance to return to approximately that level. This doesn't mean you try to catch a falling knife. It DOES mean you don't try to place bets on the market's direction and you DO remain fairly fully invested."

David G. Dietze, JD, CFA, CFP, president, PointView Financial Services in Summit, was asked which foreign investments he might recommend. His reply:

"If you've got the stomach, there are several attractive vehicles to invest in in Europe. Certainly, a European mutual fund will provide diversified exposure, with a focus on the larger, more internationally oriented blue chips. Consider Fidelity's European Capital Appreciation Fund (FECAX).

"Vanguard's European ETF (VGK) provides indexed exposure at an economical 0.18% expense ratio. Consider, also, closed-end funds, which allow you to buy professionally managed portfolios at a discount. For example, the New Germany Fund (GF) provides exposure to a basket of German and some Dutch companies at a near 14% discount to net asset value; GF has returned about 10% annually over the last five years.

"Interesting individual stocks include AstraZeneca (AZN). This London-based drug maker is active in 100 countries. It's grown earnings at a near 17% annual clip but also sports a 5.4% yield and a price-to-earnings ratio in the bottom 20% of the market.

"In the telecom sector, consider Telefonica (TEF). Shunned because of its Spanish base, it actually does most of its business in fast-growing Latin America and is the Number Two player there. It also owns stakes in China Unicom, Portugal Telecom, and Telecom Italia, so it's a virtual mutual fund of telecom players. While you're waiting for better news out of Europe, enjoy the 8.2% dividend and know that you are paying nearly 40% less than you would have late last year."

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