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A Holding Penalty that Changed the Game

January 06, 2013 | About:
Year–end Investors were penalized for holding (cash).

As congressional meetings on taxes and spending extended close to the end of 2012 I heard many comments from investment experts. Almost nobody was willing to tell people to buy stocks. Six of the seven trading days from Dec. 18 through Dec. 30 were down days.

The prevailing wisdom was that waiting for a political resolution was more prudent than risking a big sell-off if America ‘went over the cliff.' There were many great stocks being offered at terrific valuations.



Instead of recommending their favorites, most pundits were telling people it was better to miss an opportunity than to lose money if the market collapsed.

The worst you could do, they said, was just put money to work after you knew what was coming out of Washington. Many told the public to spend money buying protection (puts), if you were foolhardy enough to hold while our bickering leaders deliberated.

They couldn’t have been more wrong.

New Year's Eve trading posted a nice gain. The post-holiday session gapped up huge and never looked back. The trading gods offered no solace, or entry points to anyone who’d waited to see how congress acted before acting themselves. The full week, encompassing Dec. 31 through Jan. 4 was one of the best in years.



There is almost nothing as frustrating as being out of the market when it spikes higher. It’s doubly painful if you wasted significant money on insurance you didn’t need. The horror tripled if you were caught short when the surge occurred.

If you missed the move… do you buy now at much higher prices and with more downside risk? Can you afford to stay in cash if 2013 is a replay of 2012? Last year was a rare one. There was not one day all year that the S&P 500 closed below where it finished on Dec. 31, 2011.

Nobody will always be right in calling short-term index action. The lesson to be learned is to stop trying. Buy good stocks when they are attractively priced. Hold them until company-specific fundamentals change your mind.

You’ll trade less and likely make more.

Perhaps that should be your New Year’s resolution.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.8/5 (13 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Short term fluctuations, the hourly, daily, monthly fluctuations, and even yearly fluctuations, have to be weighed against one's estimates of price to intrinsic value. Basically, it's pretty tough if not impossible to catch the market bottoms and market tops.

Moreover we need to be aware of all of our own predispositions to compare apples to oranges, specific holdings to market holdings. That said, last year I went to cash with a number of market positions (ETFs, and funds) but retained many specific corporate holdings. As the US market jumped not all my direct positions jumped commensurately and to expect that means one might as well just hold ETFs.

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