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As bears roam, is it time for you to run?

Updated: May 3, 2013 12:14PM

Originally published: August 8, 2002

Should I sell? The odds are no better than 50/50 that we’ve seen the market bottom. It’s a Savage Truth: No one knows for sure when bear markets end--except in hindsight. So should you sell now?

When and whether to sell is the most difficult investment decision, especially when you’re losing money. The answer depends on your personal situation, your time horizon, risk tolerance and self-discipline.

But there’s a simple formula that will help you answer the question. Just ask yourself, “Would I feel worse if I sold the stock and it went back up, or if I didn’t sell, and it went down even farther?”

I’ve written many columns reminding investors that over the long run--at least 20 years--the stock market has far outperformed safer investments like bank CDs and money market funds. But many people don’t have the long-run perspective, because they’ve retired and have no way to continue adding to their investments to take advantage of lower prices.

If you simply can’t afford to lose any more money, then you have no choice but to sell on any rally.

Others with less stringent financial considerations might hedge their bets by selling half their position. That way, you’re guaranteed to be half right and half wrong.

But if you’re a long-term investor with discipline, you still need some market perspective to make intelligent decisions about when to sell. This bear market could go down farther, or simply stay at these low levels for years to come. A glance at the following chart, from Bert Dohmen’s Wellington Letter, explains why that could be the case.

The Dow Jones composite index of 65 stocks has fallen below its 1998 low of about 2,400. Dohmen ( says that all of the stock activity above that level represents stock purchased by investors at prices higher than the 1998 low. Today, those buyers are just hoping to get out even. They’re waiting to sell on the rallies. That’s why, with so much supply overhead, it will be very difficult for all those investors to get out simultaneously, and it’s likely to take a long time for the market to get back to its old highs.

Eventually, it will. Of that I have no doubt.

But can you wait it out? Can you continue to buy at these lower prices? Those are questions you’ll want to ask yourself right now.

Unfortunately much of the $6 trillion in market losses in this bear market has come inside retirement accounts, where there are no tax benefits for selling. But if you own stocks or mutual funds outside your account, you can offset losses on stocks or mutual funds against any gains you may still have in your portfolio. Then if you want to buy the losing stock back, you must wait 30 days to re-establish your position.

If your losses exceed your gains, you can write off $3,000 a year in losses against ordinary income--and carry the remaining losses forward forever, using $3,000 a year.

If Congress really wanted to do investors a favor, it could raise the loss writeoff to $10,000 a year. There are plenty of losses to go around!

Taking a loss is always painful. But if you must sell, here’s a word of advice: Never look back. Time doesn’t make losses less painful. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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