For a retail investor, with about 20 stocks or so in a portfolio, it would be feasible to completely withdraw from the market before a low probability event with a lot of potential downside, and then promptly get back in afterwards. If the event occurs, they can get back in lower. If the event does not occur, they likely can get back in for little more than the costs of the transactions.

Examples are Brexit or a Trump election win.

This is interesting because one of the only advantages a small retail investor has is the ability to large percentages of their holdings out fast.

Is this approach widely used, and if not, why?

  • 2
    All you are saying is you can guess what will happen. Sure, if you can guess what will happen you will become a billionaire in one week. Enjoy.
    – Fattie
    Oct 24 '16 at 20:28

Yes, retail investors can do this or something like this to hedge their accounts in the face of a major market shaker. The pitfalls of a sell-off and re-buy are costs, the wash sale rules, and timing of the re-buy.

I don't know how large your positions are but if you have a $10 trade commission that's $200 to sell everything, and $200 to buy them all back. Granted $400 is only 2% on a $20,000 portfolio. If any of the positions you sell is currently at a loss you'd need to be out of the position (and substantially similar positions) for at least 30 days to book the loss and avoid wash sale rules. What if, inside the 30 day window, the stocks appreciate higher than they fell? This is exactly what happened with the brexit vote. Everything fell in the tank then within a week the market was just fine. In a long term strategy, most retail investors are best off to simply let the money ride.

You can hedge in other ways by buying some options or putting money in an index short fund or buying options on the index short fund. This way you're not actually selling your positions but you'll recoup some losses in the event of a loss. If you're really concerned maybe you let your new contributions to the account sit in cash until after the event that's concerning you.

  • I'm not sure why wash sale considerations are meaningful in this case? Maybe game it out, since if the OP starts with any gain when they get out of the way of the market, there's no wash sale. And if they had a loss, they just defer their net basis to the ultimate sale.
    – user662852
    Oct 24 '16 at 20:51
  • @user662852 I edited my post, but if I were going to book the gains I'd want to book the losses too.
    – quid
    Oct 24 '16 at 21:01

Selling prior to November 8 and re-buying after November 8 (if the coast is clear) -- seems like a terrible idea for tax reasons. You are slicing your ownership period into two ownership periods. That raises the chance of one of those periods being less than a year... and causing you to be taxed at the much higher short-term capital gains rate.

The wash sale rule (sell and re-buy within 30 days) is not symmetrical. It only applies to losses.

You could try shorts, calls, puts, that sort of thing. However if you do those to the exact same stock you're holding, there are a bunch of gotchas. For instance if you short a stock you're long in, that's considered a sale, triggering the above.

So, short/put/call with other stocks that are very likely to move with your stocks, in response to the market threats you perceive.

  • +1 for the reference to tax gotchas on calls & puts. Fascinating. Oct 26 '16 at 6:57

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