Ive been thinking the stock market was due for a major decline since 2004 but I got it wrong. The market index went where it wanted to go on its timeline not mine. I had bought puts on the index years ago and quickly won and lost or lost and won. But when I won or lost on those particular bets it was done with risk capital, money not essential to providing for myself in any way. I simply wanted to test a belief. But you, those out in stock land, who dont understand how or why the game is played, referring to a post last week titled Sell, sell now, you fool may help you realize that no one is going to save you from your own poor decisions.
A retired lady asked me in a panic about what she should do Is my money safe? Of course not, cheap stocks can get cheaper, her money had been shifted into a money market fund years ago but she had one particular stock holding remaining and it hadnt been doing much of anything other than slowly going down over the past few years and working up part of the way only to slowly decline. She claimed she doesnt need the money for her retirement if the stock declines (she acquired the shares twenty to thirty years ago, perhaps more), but you never know when an emergency will arise. I asked her to think about the solution logically: If you short the stock, you are hedged from any further decline (although you are on the hook for any margin interest), and if you buy in-the-money puts it will cost you several hundred dollars, and if you sell out-of-the-money calls and use that money to buy out-of-the-money puts the partial hedge/insurance on your position doesnt cost you anything. She is protected from a worst-case scenario: PAWS (plenty of almost worthless stock). This is when you are stuck with a holding and hoping it goes up so you dont lose almost all of your money on it. This kind of situation produces stress and it could take years for a particular stock to recover. There is only one situation that must be planned for: you must accept the risk of PAWS and for those that dispose of holdings in their retirement accounts there are no tax consequences so, why not use a little logic? If your stock holdings go up a little, it doesnt change your financial standing, if your stocks double in price great, but that outcome isnt likely (so why are you still hanging around?), and if your holdings decline a little from the price you paid it doesnt materially affect your financial standing. There is only one case that changes your financial standing significantly adversely: your holdings go down significantly and stay down. Thats the only way you really lose. The choice is yours, while you still have one.