Should I sell some stocks now and wait for a market correction?

Since the US presidential election, both US and Canadian stock exchanges have been on a run. It seems that Dow Jones, S&P 500, and TSX indices are making all-time-highs every other day. It has been a wild ride to say the least. If you have been investing for a while, you know that stocks go up and eventually they go down. The other day my brother asked me a question – Should I sell some stocks now and wait for a market correction? His rationale? Since the stock indices are at all-time-highs, he’s thinking about selling some of his stocks now for a profit. He would buy some reverse index ETFs (i.e. SH, SPXU, HXD) to hedge against a down market and buy back when stock prices are lower. If I look at our dividend portfolio, it is sitting at an all-time-high value too. Should I sell some stocks now and wait for a market correction like my brother suggested? Or just keep executing our investing strategy – continue holding stocks and buy dividend growth stocks when they’re on discount? Here are my thoughts on this interesting topic.

  1.  Market timing does not work. If market timing works, why don’t we see any of them on Fortune’s annual richest list? (Pretty sure a smart investor had a similar quote but I can’t find it).
  2. Many of our holdings have higher yield on cost than what’s available today. Yes, we would make some nice profits if we sell. Since our focus is dividend income, the question is, can we buy back at a price that would result in similar dividend yield? For example, our yield on cost for Waste Management (WM) is well above 5%. At current price, Waste Management has a dividend yield of 2.34%. To get a 5% dividend yield, the price of the stock would have to go below $32.80. That means a drop of more than 50% in today’s price. Is it likely that WM will drop 50% in price? I would argue this is very unlikely. Note: This is the simplistic calculation because you have to compare dividend yields between current holding (original capital, i.e. cost on yield) and new holding (profit + original capital).
  3. It is impossible to say whether the stock market will continue going up, or we will see a market correction soon. Back in 2010, with the financial crisis still fresh in memory, many people avoided the stock market. They kept waiting for a correction before entering the stock market. If they simply kept their cash and stayed on the sideline, they would have missed the second longest bull market in history.
  4. Perhaps it makes some sense to sell a small portion of cyclical stocks and reinvest the money somewhere else. For example, it might make sense to sell some oil stocks now price of many oil stocks have recovered.
  5. Rather than looking at the current stock price and evaluate them purely using PE ratio. We should examine our portfolio holding using parameters like Graham’s Number, Chowder Rule, PEG ratio, and Return on Equity (ROE). Perhaps using these parameters will show that dividend stocks in our portfolio are not overvalued. Note: I have been using Simple Wall St for stock analysis, which I found extremely useful.
  6.  Having recession-proof stocks will limit the impact of a market correction. Stocks like Protector & Gamble, Johnson & Johnson, Unilever, and Coca-Cola should offer some hedging against a market correction.
  7. A good percentage of our dividend portfolio consists of financial stocks like Canadian banks, insurance companies, and other financial institutions. Canadian banks seem to have a way to make money regardless what the economy is doing. Sure the Canadian housing market is a worry but it appears that many banks have limited their exposures to Canadian housing mortgages. With pending interest rate hikes, insurance companies should benefit (insurance companies buy bonds to protect their investments). Lastly, companies like Visa will continue to make money as long as people use credits. Therefore, I am not at all worried about our exposure to financial stocks.

Should I sell some stocks now and wait for a market correction? I think from points above you can guess that we probably won’t be selling our stocks. If we do sell, it would be more cyclical stocks. For now I’m optimistic on the stock market. I believe the market should continue going up in the near future…but I’m not a market expert so I could be wrong. But if the market goes down, that would provide opportunities to buy stocks at a lower price. Since we are still in the accumulation phase, I would love to see a down market to allow us to add discounted stocks to our dividend portfolio. Last thing I want is buying over-valued stocks. Having said all this, if a janitor or a teacher starts giving me stock picking tips, that’s when I would be worried. If that happens, I would start considering sell more of our dividend stocks.

Dear readers, what do you think? Are you going to sell some stocks now and wait for a stock market correction?

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59 thoughts on “Should I sell some stocks now and wait for a market correction?”

  1. Personally, I’m lucky I don’t have to worry about it right now.

    Most of our funds available for investing (65%) are sitting on the sidelines waiting to be invested into our home build 🙁

    That said, I’m not entirely comfortable with the market at the moment and would likely take some chips off the table.

    Would I attempt to time the market and take all my chips out? No. Would I be willing to put 50% of my investments into cash right now, yes.

    Maybe it’s the wrong approach and I’m okay with people telling me I’m an idiot, but I’m comfortable doing an alternate approach. Specifically, take some of the wins off the table and pay down our mortgage. Replace the mortgage that was paid down with a home equity line of credit. If the market does have a serious correction, draw on the home equity line to take advantage. If it doesn’t correct, you’re making 3% – 4% on your own home without the debt.

    To me, that is an alternative way to approach having a downside cash reserve and opportunity fund when the market is overheated.

  2. We have an asset allocation that we are comfortable with. If there is a major market correction, we will rebalance to our target allocation by way of DCA and a bi-annual portfolio review. It is too hard for an individual investor to time the market. It is easy when you just rely on allocation bands.

  3. The thought has crossed my mind as well…
    I wonder: why does a DGI investors worries about the face value of the stock? The only thing I can imagine: hope to buy back at a lower price so you end up with more stock and thus more dividend. That being said, it is very tempting to sell my ETF and hope to buy back lower. Last time I tried that, I lost 1000USD in my option portfolio…

    Like mustarseedmoney, I have a play portfolio…and there it is all play…

  4. I don’t proclaim to be an expert but my experience investing for 20 years repeatedly points to staying invested in stocks during bear and bull runs. It is something I believe in pretty strongly. That being said, I understand the desire to do so. Investing is emotional and this is hard earned money that the investor wants to protect. It is hard to resist the temptation to sell but if at all possible, you should do so. You will be much happier in the long run. Great post, thanks for sharing!


  5. It has been a really awesome time to own unhedged US Stocks in CAD ever since Trump was elected. Majority of my holding are in VUN and that has benefited massively from not only the surge in stock values but also the surge in the USD. As of October 31 I’d had about a 4% return for the year, now I’m sitting closer to 9% merely thanks to Trumps election.

    As for getting out of the market, I see no reason to personally. There are no signs the economy is waning, in fact corporate profits are extremely robust and expected to be even better under Trump. There is a reason the markets are soaring right now. The P/E ratio is a little above average but nothing out of this world.

    I’m a firm believer in not trying to time the market, so I’ll likely never try and get in or out at a certain time. If the market crashes, so be it, time to take advantage of the low prices.

    • It’s pretty insane how much the market has rallied since Trump’s win. I was excepting volatility with his win… but that’s why I’m not a market predictor. 🙂

  6. If you have something to buy, go for it. After the rebound post Brexit, I sold about $50,000 of stock to pay for my deck, retaining wall, and new sliding glass doors. It was all profit from a $150,000 investment I made years ago. It felt GREAT! Like getting some physical benefits for free.


    • Having some physical benefits for free is pretty awesome. We don’t need the money for physical benefits. If we sold anything that money would go back to purchase stocks later. Can we really time the market correctly? I’m not so confident on that.

  7. I’m with you Tawcan. I bought these stocks for a reason and they are long term investments. If they go higher, great, if they go lower that’s fine too. I have time on my side for now.

    For the most part 90% of my portfolio is in passive index funds and then I like to “play” around with the other 10% of my portfolio with stocks that interest me.

    Thanks for the awesome overview!!!

  8. I am a DGI investor, I have been for years.

    YOC is a cool metric, but all it is, is current yield / book value – therefore it is a backward looking metric and can tell you NOTHING about what is happening now with either your current or prospective investments.

    If you are an income based investor, which I suspect most people reading this site are, then after you compare business fundamentals including valuation (based on market value of course!) then all you need to compare is current yield of the two investments to tell you which will pay you more income.
    YOC will NOT tell you anything useful, and worse than that, it can mislead you, like it has Tawcan, into thinking that a current investment is more ‘valuable’ than a prospective one simply because of “YOC” It is foolish to think otherwise – but it’s your money, invest as you wish.

  9. Hey tawcan.
    The contrary is the case. if you sell options in the correct way you have less risk on your stocks than simply owning it.

    but you are right: If you dont use it correctly, you can use it speculative. but this is something I would not do and would not recommend to anyone!

    the option buyers are the speculators, the option sellers are the investors with less risk and more reward.

    maybe I can show you what I mean on a sheet of paper with a beer, if I am on one of my trips around the world 🙂

    best regards

  10. Hey Matt,

    Not sure I agree either. If you’re looking at investing from an income perspective, then YOC is pretty damn important! It’s how much you’re getting paid based on how much you paid, which factors into your ROI.

    Either way, readers should always do their own research and not take anything that any financial blogger says as fact. Tawcan isn’t a financial adviser or financial professional, and he has never claimed so.

    • I think the point the prior investor is making though is fair. It’s a sunk cost. It’s irrelevant to a go-forward decision.

      Let me use an example.

      We have two stocks, let’s call them A and B.

      I bought A five years ago for $5 per share and it has a dividend of 50 cents.

      At that time B was trading at $10 and had a dividend of 90 cents.

      I assumed all else was equal, so I bought A as a smart investor would.

      Fast forward to today.

      Stock A is priced at $10 and still has a dividend of 50 cents.

      Stock B declined in price to $5, but they maintained their 90 cent dividend.

      Are you saying that my yield on cost should play into deciding whether to sell A and buy B? Why?

      Shouldn’t I only be concerned with the greatest return to risk ratio on a go forward basis?

      All else equal, if you’re focused on the historical yield on cost of these investments, you’d make poor decisions.

  11. Glad to see we’re on the same page, Tawcan!

    It’s very tempting to sell things like MCD or JNJ, with their 50% profits since I bought them… but then I see their YOC and relax 🙂 I am also expecting the market to enter a correction at some point, which is when I’ll deploy most of my cash. Having said that, I’m still buying stocks from my watch-list here and there, when the opportunity arises.

    For all I know, the market may continue to rise for the next decade! Wouldn’t wanna be stock with so much cash in that veeery likely scenario 😉

    • I think ultimately you need to find the balance between take a profit (if it makes sense and if company’s matrix changes) and continue holding dividend stock. It’s not just completely based on YOC, that’s just one of the metrics to use. For example if MCD future growth and profitability don’t look good and that the dividend growth starts to decrease, then perhaps it makes sense to sell MCD and buy something else despite a high YOC.

  12. Tawcan, i will deploy my cash when i see buying opportunities. But market is just too pricey right now to buy anything.

    Also, i always keep 25% cash at all times just in case there is a market correction.

    Renewed investor

  13. I’m a Boglehead who likes to stay the course and not time the market. But I’m not gonna lie, the same thoughts you mentioned has creeped into my head. I’ve had a pretty bad track record of buying high and selling low so I might be better off keeping my hands off of it. Also, many assumed that the market would crash after Trump was elected because of the uncertainty and instability…the exact opposite has happened. So, yea….who knows!

  14. Not selling. All my stocks are dividend growth stocks. Not buying either. Market too expensive. Currently holding 50% cash.

    Renewed investor

  15. Are you crazy? Of course he should sell his stocks today and wait for the market correction. It’s simple math. He’ll be buying them at a lower price. Oh, what’s that? Nobody has a clue when or if that market correction will happen. Nevermind then. Carry on.

  16. I can’t say I haven’t thought the same thing but if Mr. Trump gets his way things should look very bullish going forward. For instance his plan to cut the corporate tax rate down from what is essentially the highest in the world to a mere 15% would be massive. It would instantly give all US companies improved margins which should translate in to lower P/E ratios and push the markets higher. Well see what happens.

  17. I was the classic case of you #3.

    I sold 50% of my stocks waiting for that “double dip” that never happened.

    Market timing is impossible. Saying that, I always keep some cash. I don’t sell but buy less as valuation metrics continue to grow worse.

    I’m pondering what % of my portfolio I should keep in cash. I’m thinking 20-25 percent.

    • That sucks you were never able to “double dip.” I guess you have first hand how hard is it do time the market.

      In terms of how much cash to keep, that will be different for each individual.

  18. Hey Tawcan,

    I would not sell.
    If you do you are on the path to speculating. this is the worst thing you could do. I would stay on track and hoard cash if the market drops. So you can maybe double down you existing positions.

    If a market crash is coming I will heavily sell calls for amazing profits, but I will not sell my existing positions.

    Stay on track!
    best regards

  19. Believe this is the quote you’re referring to? 🙂

    “I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

    Peter Lynch

  20. Staying the course as well. I am moving around a bit with new contributions, but thats primarily related to the run up in stocks recently driving a need to rebalance slightly (which I usually do this time of year). If anything happens my event horizon is still long enough that it would just be a buying opportunity.

  21. I think you asked the easier question – the obvious answer is never sell good stock to wait on a market correction. I think the more difficult question is it a good time to build your cash account so you can be ready when the correction comes? I think it is, as long as you can trust yourself to buy in on the downside, knowing that you will not be so lucky as to buy in at the bottom.

    • Interesting that you mentioned about a $1M portfolio… mind to explain why the different mindset that you’d considering selling if your portfolio is over $1M?

  22. I’m holding for the most part but am doing some strategic selling of biotech stocks for tax-loss purposes. Since they are down so much now (with respect to the market as a whole), other than the initial sale to lock in the loss, I’m going to be a huge buyer at these levels.


  23. I follow the Kevin O Leary thinking, where he says to stay diversified in all sectors and decide ahead of time what percentage you wish to invest in any one stock and any one sector. He advises no more than 5% in any individual stock & no more than 20% in any sector. If you keep to that theory you will trim in areas that have exceeded those levels, and keep in cash until you see opportunities in sectors & stocks undervalued.

  24. We’re similarly against market timing (both because of the work it entails, and the pesky fact that it does not work). But I’ve found that for people who are thinking of selling and buying back in, the root cause may be a too-aggressive asset allocation. They’re wanting to avoid losses. That’s a sign they may need more steadying assets in order to sleep at night and, more importantly, avoid selling when the dip does come.

    • Very true about too-aggressive asset allocation. You shouldn’t be investing with money that you need in 3-5 years. Think long term. People that selling and buy back in are often looking at short term gains over long term gains.

  25. No one knows what will happen in the future. Just look at these two headlines from CNBC in the last 24 hours:
    “Economist Harry Dent predicts ‘once in a lifetime’ market crash, says Dow could plunge 17,000 points” &
    “Uber bull Jeremy Siegel sees Dow 20K any day now as market cheers ‘pro-business president’ Trump” DOW 50K or DOW 5K… who knows. Just stay invested in solid, sustainable dividend paying stocks and take a walk outside. I have no plans to sell at this point.

  26. I’m with you…stay the course. You never know when the market will turn. But what you can do is buy companies when they’re a good long-term value, and sell those that have poor long-term prospects.

    That tends to mean we buy less when the market is at its highs, like right now. Eventually we get our chance though!

    • Yeah we’re staying course but like I mentioned, maybe take a look some cyclical stocks. It’s hard to predict these cyclical stocks and I don’t like unpredictability so yes I agree with you buy companies when they’re a good long-term value and sell those that have poor long-term prospects. It’s all about long term profitability.

  27. No selling of stocks. No attempts at market timing. No drastic nothing. No no no. Lead us not into temptation, oh stock market. We are staying the course and investing as usual.

    I just did a little buying and selling to stay at my ideal asset allocation. In my world, that counts as a major move.

  28. I see you are still using YOC incorrectly.

    As a financial blogger it is your responsibility to use this ‘metric’ correctly. You are not using it correctly.
    I am not going to rehash the argument again except to say that YOC should never be used to make a purchase or sell decision. NEVER. It is a metric for interests sake only. It is NEVER to be used for buy or sell decisions.
    You are doing your readers a disservice by treating YOC as you do.

    Again, other than this key mistake – I agree with your article.

    • Hi Matt,

      While I appreciate your feedback but I do not agree with your statement. YOC is an important factor if you plan to use dividend income to supplement in your retirement. It’s a historical metric rather than a forward looking metric so it shouldn’t be the only parameter used for deciding whether to buy or sell. It’s not the only metric that I’m basing my sell decision on, simply one of the many metrics.


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