Thoughts on Quitting While You’re Ahead

by Matthew Makowski, Research Analyst, The Oxford Club

What's the first thing you think about when you read the word "quit"? In American vernacular, the word's had a bad rap for a long time.

Quitting is often seen as a sign of cowardice. And like Gen. George S. Patton famously told his troops about to storm into German-occupied France some 74 years ago, "Americans despise cowards."

But quitting and cowardice are not necessarily one in the same. Quitting is not a bad thing if done for the right reasons.

We're in the midst (some say the end) of the longest bull market ever. The unemployment rate is looking good - and so is the GDP. Based on this, would you consider quitting the stock market right now?

Put another way... picture September 2008. If you could go back and pull out any money you had in the stock market, would you? Or would you let it ride until it was too late?

Perhaps that's a softball question, but it should still give you pause, especially if you're the risk-averse type. Foresight isn't quite as clear as hindsight. But we can mine the past for recurring events that shape the future.

Take today's chart, for instance. While the market was peaking, interest rates were bottomed out, effectively at 0% for seven years.

But in the past two years, the Federal Reserve increased interest rates five times. And it has signaled that two more hikes are in store before the end of the year.

When that blue line starts to go up again, it signals more volatility in the market... and more risk. For some investors, that risk is simply unmanageable.

And this isn't a new phenomenon. Historically, when the Fed starts compensating for low inflation with a quick succession of upticks, bad news in the market often follows.

The 35 interest rate hikes implemented in the 1970s definitely didn't do the markets any favors. The S&P 500 was subsequently cut down to size... by half. And it took almost 15 years to recover.

An even clearer correlation to what we're currently experiencing happened in the 1990s. It took only 11 interest rate hikes to prompt the market uncertainty that sent the S&P tumbling.

The end isn't necessarily nigh, but a market correction is in the future.

So ask yourself this: Can you afford to lose 10% of your nest egg? How about 20%? Nobody knows how big the coming correction will be. But as long as the Fed keeps meddling, it's just a matter of time.

The markets will forever go up and down. It's how we're able to benefit financially. But the best time to quit and pull your money out is right before you wish you had.

Good investing,

Matthew

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