It seems that a second wave of the pandemic is coming in the US and with stocks in a bubble, is it time to sell stocks and take profits?
Nobody knows what will happen, maybe the Fed will just keep printing money and the crash will never happen. But as intelligent investors, we need to prepare ourselves for any scenario.
This bull market is unprecedented. Nobody expected the markets $SPX500 to crash by 35% in a few weeks only to recover after 3 months. What makes you think that those people who are predicting a crash are right? There's still a lot of volatilities with the Vix index $VXX above 30. Since volatilities happen on both sides, the markets have been volatile lately. But the real question is not whether the markets will be volatile but rather whether a crash will come.
The main reason why people expect a crash to come is because the Federal Reserve System, the Fed is printing so much money. But it doesn't have to. If the Fed is printing money, the money has to go somewhere. There is the possibility of higher inflation without the markets ever crashing. If the S&P 500 gains 10% with inflation at 6%, that's only a 4% gain.
If the Fed stops printing money then a crash may happen since the stock market is dependent on the Fed. Nobody knows what will happen. How do we prepare our portfolio?
After the 2018 correction, stocks were already expensive and I took profits on many of my investments, for example, Apple $AAPL used to be 15% of my portfolio. Now it is only 2%. I wanted to diversify away from US stocks. Then, this bear market happened but stocks didn't get cheap enough for me to change my portfolio allocation. I was only buying stocks in sectors which have been hit by the recession.
One of the stocks which I bought was Alaska Air Group $ALK . I started buying at about $25. If the stock price goes to $150 in 10 years, that's a 500% gain, or 20% a year. That's a great return. But it already gained 100% in 3 months. Does it mean, I need to sell? Why should I sell? It is not expensive. The business fundamentals didn't change. It is not as cheap as in the past but I can still hold for the long-term. If the stock crashes, I'll buy more.
It doesn't matter what happens to the markets. What matters are individual businesses and stocks. Ther spread between the NASDAQ and NYSE is larger than ever with only some big tech companies contributing to most of the gains of the S&P 500. But you can still find cheap stocks to buy. You can always diversify away from the US.
If you know where to look, you can always find great stocks to buy. I'm not buying stocks aggressively like I used to in March but I am still buying. It is better to focus on individual stocks rather than the market. If a stock is cheap, buy it. When it gets expensive, sell it.
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