Strategies for stock-market sales events

Last week, I noted the stock market is having a Black Friday sale. With the big 600-plus point, one day Dow jump this past Wednesday just one week later on news the Federal Reserve chairman might consider less drastic anti-inflation fighting action, you need a stock market sale strategy more than a Black Friday shopping plan.

Unlike with sales at stores, investors tend to be fearful of falling stock prices. In some ways they are like luxury shoppers: They almost prefer higher prices as a sign of success and quality. While momentum investing may work for some professionals (but definitely not most), for your 401(k) or other portfolios it will likely lead to buying high and selling low. You need something workable.

When there is a 25 percent off sale on last year’s Apple MacBook buyers jump. A roughly 25 percent drop in Apple’s stock price, as we’ve seen in recent weeks, isn’t as enticing to investors.

As stocks and bonds have dipped in recent weeks globally, investors are going to earn higher returns over the next 10-plus years on money invested today than they would have with money invested a few months ago. The stock and bond markets have higher yields now than earlier this year.

Does this mean prices can’t go lower to even better deals? No, but sale prices at stores can go lower too and that doesn’t keep people from sleeping outside of a Target to get the best prices of the year.

On Black Friday the U.S. stock market was down about 10 percent from the peak in September. Even with Wednesday’s pop in stocks, the market is down around 7 percent. Technology and more growth-oriented companies were down even more – about 15 percent last Friday and are still down by double-digits. Many individual companies are down well over 20 percent. Foreign stocks are down even more than the U.S. market, and many bond funds have taken 10 percent hits. Almost everything in the store is on sale -- not just the bad merchandise (sorry GE).

Yet investors have been pulling money out of mutual funds and ETFs in recent weeks. In fact the last month investors where really enthusiastic about investing was in January right around when the trouble started for this rocky year. Investors don’t bargain shop – they buy trendy. That’s why tens of billions of dollars a month went into tech funds in early 2000 shortly before the crash.

This isn’t the buying opportunity of a lifetime. It doesn’t have to be if you have a longer time horizon. But you should be doing more buying during sales than in other months – just like regular shoppers. You probably did more shopping on the days around Black Friday and Cyber Monday than in other months this year – I did. Do the same in your portfolio.

"How do you know a specific stock isn’t going to zero? You really don’t. But don’t worry, your new MacBook or TV will definitely be worth near zero in 10 years. Most stocks will be worth more in 10 years."

How do you know the stock market isn’t going to drop roughly 50 percent again like it did in 2000 and 2007? You don’t and it might, particularly tech stocks which have been cruisin’ for a bruisin’ for quite some time now. How do you know a specific stock isn’t going to zero? You really don’t. But don’t worry, your new MacBook or TV will definitely be worth near zero in 10 years. Most stocks will be worth more in 10 years.

There are several simple ways to reduce these risks of losing 50 percent or worse, 100 percent. First of all, consider not buying individual stocks. Facebook could go bankrupt within 10 years. The stock could fall 50 percent to 75 percent from the recent top just because of the mess they are in now. With an individual stock a 25 percent sale could be a sign the future is crumbling fast. Be aware the stock market isn’t going to go up 100 percent in a year like individual stocks can as well.

This total loss scenario is less of a risk with Apple (which has fallen this much or more many times over the years) but is still a risk with any individual stock. This would be the investor equivalent of buying something only because it is on sale when there was a very good reason the seller put the item on sale: It isn’t worth anywhere near full price.

Good news: This risk of such a bad sale purchase essentially doesn’t exist when you buy a total stock market index fund. A single stock may or may not exist in 10 years. The entire stock market will be around and has a near-100 percent chance of being at least a little higher (with dividends) than the price you paid after a 10 percent sale even if you get a 50 percent sale later.

If you buy a low-fee broad stock market index fund (like my new favorite Fidelity® ZERO Total Market Index Fund – FZROX - the first free mutual fund…talk about a sale!) you will benefit from the sale pricing at the stock market mall with essentially zero risk of a 100 percent loss. You will still have the 50 percent loss risk. Maybe in a once-a-century depression you could experience a brief 75 percent loss but it won’t last. This can be a serious issue for those in or near retirement looking to draw down money, much less so for an investor saving for a future goals.

There are several options available to a longer-term investor looking to benefit from sales, the main bad one is cashing out or waiting indefinitely for ‘better times’ because you won’t be able to time this well and stocks are the best deal during bad times. After a 40 percent drop a 70 percent drop will seem very possible yet probably won’t happen.

Max’s Black Friday Sale Stock Market Strategies

1) Do Nothing

A Perfectly legitimate strategy if you are invested in low fee index funds and don’t want to change your investments which for some younger investors may already be 100 percent stocks anyway. Not a good strategy if in cash waiting for lower prices.

2) Actively increase your stock allocation

If you were say 60 percent stocks and 40 percent bonds and cash, a 10 percent drop is a good time to consider going to say 65 percent or even 70 percent stocks. Use the next 10 percent drop, if there is one, to keep going up slowly. Maybe you get to 100 percent stocks after 30 percent or 40 percent from the top. Can you still lose money? Sure and you would have in 2000 and 2007 when stocks fell around 50 percent.

You can also do this in your 401(k) by simply moving to a further out retirement date all-in-one fund by say selling the 2040 fund you are in for a 2045 fund which will have more in stocks and less in bonds and cash. Think of it this way…wow with this slide I may need to put off retirement… (you probably won’t, but it will remind you to change your Target Retirement fund date to a later retirement date).

3) Passively increase your stock allocation

If you own a balanced stock fund or more likely a target date fund in your 401(k), a significant slide in stocks will likely lead to your fund manager buying more stocks to rebalance the portfolio back to say 60 percent/40 percent stocks to bonds because market moves may have lead the stock side of the portfolio to decline below 60 percent. Some more actively managed funds may not do this as they can get as skittish as you about stocks going down.

You can also do this move with two funds on your own – just rebalance the stock fund back to where you want to be after the drop – like if you were at 60 percent before and now are at 55 percent go back to 60 percent by moving money from cash or bonds. Many 401(k) plans allow you to automatically rebalance your holdings. NOTE the opposite will and should happen in strong up markets and that is ok as you will be effectively cutting back on stocks on the way up and buying on the way down, just not in very big adjustments. This is why a balanced index fund is a very good portfolio for most.

Nobody knows where this stock sale will end or if Wednesday’s pop will get erased with next week’s drop or if this time will be the roughly 10 percent of the time that a 10 percent dip turns into a 20 percent to 50 percent bear market with a recession chaser. That is why famed investor Warren Buffett still has tons of cash along with his stocks – he will be buying all the way down and with a big enough drop expect him to have significantly less cash.

The takeaway is you should be doing much of your stock market shopping after a price reduction. It doesn’t need to be the sale of the decade like in 2002 and 2009 after 50 percent drops. The sale of the year is good enough to take some action just like you do on Black Friday in stores.

But what about that 50 percent drop you really, really don’t want to see? Coming soon, why a 50 percent drop can be the best thing that can happen to most working and saving investors.

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Jonas Max Ferris is the co-founder of, a free website analyzing mutual funds and ETFs with a special focus on fees and favoring out of favor funds, and an investment advisor.