In his book Retirement’s Harsh New Realities, Gordon Pape says
“Moving some assets from an equity fund to a money market or bond fund during [periods when stock markets are going through a rough time] is only prudent.”This sounds smart until you break it down. “Stock markets going through a rough time” means that stock prices have dropped sharply in the recent past. “Moving some assets from an equity fund” means selling stocks. So, we can translate this advice into “Selling stocks after their prices have dropped sharply is only prudent.” So, we are told to sell stocks when their prices are low.
Some may argue that a “rough period” refers to the near future of stock prices and the advice is actually to sell before prices drop. However, we don’t know when the stock market will drop. When the typical person speaks of a rough period for stocks, it is after prices have dropped, not before. We tend to assume that the near future will be an extrapolation of the recent past, but this doesn’t work for stocks.
At a later point in the book, Pape says
“The minimum allocation [to stocks] should be 20 percent, and you would be at that level only during full-blown bear markets or if you are approaching, or past, retirement.”Once again, we have to break this down. “Full-blown bear markets” means when stock prices have dropped sharply. The fact that investors are pessimistic about the near future has little bearing on what will actually happen. Getting to the “minimum allocation” means selling stocks. Again, the advice amounts to “sell low.”
Typical investors would do well to admit to themselves that they have no idea what will happen to stock prices in the near term and that they still won’t know after listening to several “experts” with conflicting predictions. Then they will be able to see that some smart-sounding advice actually amounts to buy high and sell low, which is the opposite of what they really want.