Year–End: Investors were Penalized for Holding Cash

Year–End: Investors were Penalized for Holding Cash

Courtesy of Dr. Paul Price

As congressional meetings on taxes and spending extended close to the end of 2012 I heard many comments from investment experts. Almost nobody was willing to tell people to buy stocks. Six of the seven trading days from December 18th through December 30th were down days.

The prevailing wisdom was that waiting for a political resolution was more prudent than risking a big sell-off if America ‘went over the cliff’.  There were many great stocks being offered at terrific valuations.

Instead of recommending their favorites, most pundits were telling people it was better to miss an opportunity than to lose money if the market collapsed.

They said, wait to put your money to work, till after you knew what was coming out of Washington. Many told the public to spend money buying protection (puts), if you were foolhardy enough to hold while our bickering leaders deliberated.

(Click on charts to enlarge)

SPY Dec. 18 - Dec. 30, 2012    source- Yahoo Finance

They couldn’t have been more wrong.

New Year Eve trading posted a nice gain. The post-holiday session gapped up huge and never looked back.  The trading gods offered no solace, or entry points to anyone who’d waited to see how congress acted before acting themselves. The full week, encompassing December 31 through January 4th was one of the best in years.

SPY  Dec. 28, 2012 - Jan. 4, 2013

There is almost nothing as frustrating as being out of the market when it spikes higher. It’s doubly painful if you wasted  significant money on insurance you didn’t need. The horror tripled if you were caught short when the surge occurred.

If you missed the move… do you buy now at much higher prices and with more downside risk? Can you afford to stay in cash if 2013 is a replay of 2012? Last year was a rare one. There was not one day all year that the S&P 500 closed below where it finished on Dec. 31, 2011.

Nobody will always be right in calling short-term index action. The lesson to be learned is to stop trying. Buy good stocks when they are attractively priced. Hold them until company-specific fundamentals change your mind.

You’ll trade less and likely make more.

Perhaps that should be your New Year’s resolution.

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  1. […] Year–End: Investors were Penalized for Holding Cash. Waiting for better prices proved costly. […]

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