Before the rate of trade charges collapsed through competition, it cost as much as $300 just to buy or sell a stock. So, if you bought 100 shares of KC Power & Light at $20 per share, the trade charge amounted to 15 percent.
The stock paid a decent dividend, but it was not going to rise by 20 or more percent quickly so that you could afford to sell it and buy another choice. In these days of very cheap or even zero trade commissions, that reason has lost its validity.
The reason which still stands today is that almost all casual investors without good help will wait until they can stand the losses no longer and sell everything—a fact which usually signals the bottom of the cycle. Then the professionals and those with the greatest sums of investment capital buy back in and Mr. Market begins the next bullish trend.
Another valid reason not to sell during a slump? If you have a long enough future time horizon, general stock indexes have risen again above the last high point every time. (Since the 17th Century, tulip bulbs in the Netherlands have never risen to their insane prices. Not very diversified.) But only God himself knows our personal time horizon.
This is a wise-sounding statement. No one can tell the exact day of a market top or bottom. This is exactly true and totally irrelevant. (By the way, I was able to recognize the absolute bottom of the 2000-02 bear market of October 9th, 2002, by the end of that week, but that is rare.) More on this below.
With these difficulties, why should anyone try to reallocate their portfolio during a major trend change? Let’s go to the math.
Assume your portfolio on January 3, 2022, was worth $100,000. If invested in the S&P 500, by last Friday, your value was about $76,700, or more than 23 percent less. If you were more aggressive and you were invested in the Nasdaq 100, your balance would have been about $68,400.
Or assume you were focused on safety and income and were invested in the Aggregate Bond Index. You still had about $88,000 left of your $100,000.
How much recovery will move you back to your original January 3rd balance? The bond index fund must rise almost 14 percent from here. The S&P 500 must rise about 30 percent and the Nasdaq 100 by 46 percent. Just regaining the percentage amount you have lost does not get you back to even.
My well-educated guess is that in spite of the higher stock market move of yesterday morning (which might last even a few weeks), we will see the current bearish market trend continue for a few more months at the least. Many of the high flying stocks are still richly valued. The bonds that are paying interest at such a small percentage of the inflation rate may not fare much better.