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I want to preface this with saying I am not asking if there will be a recession because I recognize that this is impossible to answer. I am asking if I feel there will be a recession, what should I do with the stock I own?

I recognize this answer might be different for different kind of stocks, so I am specifically asking for mutual funds/ETFs that basically follow the health of the US stock market that I know for certain would be negatively affected by a recession.

I am usually inclined to ignore day-to-day movements of lets say, FXAIX as I don't follow it stringently enough to accurately day trade because I just dollar cost average each month (buying the same value of stock, taking advantage of buying more partial shares if the price drops).

This approach doesn't involve selling really, so I don't normally sell shares. My question is: is this a bad idea? If I anticipate a recession, should I sell the stock I have and then wait for everything to bottom out and then resume dollar-cost-averaging? Or should I just proceed as normal?

If I anticipate a recession should I sell the stock I have,

That's market timing.

and then wait for everything to bottom out and then resume dollar-cost-averaging? Or should I just proceed as normal?

If you're investing for the long term, then the whole point of DCA -- the very definition -- is to keep on investing the same dollar amount no matter what the market does.

HOWEVER...

Your risk tolerance, goals and the time frame must be taken into consideration.

Putting 100% of your investments in a volatile fund like FXAIX is only considered a Good Idea if you're young and saving for the very long term.

Us older people have a lower risk tolerance and put more money in bonds and stocks with lower volatility.

Bottom line: balance your portfolio based upon your goals (and the plan you devise base on those goals), not upon your fears.

The answer to this question depends heavily on your ability to accurately predict a recession.

Hypothetically speaking, if you were 100% accurate with your prediction, the obvious choice would be to sell your stocks. You would avoid all of the downside, which would allow you to invest your money elsewhere and/or maximize your reentry when the market turns bullish again.

In reality, you can't make any stock market predication with 100% accuracy, so you need to decide whether or not timing the market is something you want to attempt. You'll want to consider your risk exposure, investment timeframe, and alternative investments.

Take the 2008 recession as an example. The market dropped nearly 60% from October 2007 highs down to February 2009 lows. As of today, the market is roughly 80% higher than the October highs and over 300% higher than the February 2009 lows. This provides a couple key insights:

1. If you could've predicted the recession, you would have protected yourself from 60% downside.


2. If you predicted the recession and the reversal off lows, your returns would be over 200% higher than if you had simply held through the recession.


3. Long-term, both strategies (holding and selling) yielded profits.

The last consideration is what happens if your prediction is completely inaccurate. If you sell prematurely, you are limiting your upside. People have been talking about bear markets non-stop since 2010 and they've all been wrong so far. These predictions, if acted on, would've severely limited investor returns over the past decade.

Of course, if you expect a recession, you can hedge risk without being "all out." For example:

1. Sell a portion of your stocks or a piece of your positions in certain stocks (i.e. 500 shares of a 1000 share position)


2. Set tighter stops (or trailing stops) to limit your downside.

If the market (and your stock) are going to drop significantly, it's a great idea to stop your DCA program. It's an even better idea to sell your stock.

If you sell your stock, you're going to pay taxes on the gain unless it's a sheltered account. That's not a bad thing if the market drops ~50% as it did in 2000 and 2008.

OTOH, if you sell your stock and it's just a small market correction, perhaps you pay some taxes and you definitely miss out to the upside until you realize that you were wrong and go back in.

So effectively, you are asking us to tell you what's going to happen in the future so that we can answer your question: "Is this a bad idea?" No one knows that answer in advance. So you just have to pick your poison. Ride it out or protect your portfolio value.

There are ways to hedge your position so that the market makes the decision for you but such hedging is beyond the scope of this limited space.

Remember the golden rule: Buy low, sell high.

The reason everyone is afraid to give you the obvious advice is that they're afraid you won't do that. And on average, they're right as rain.

What typically happens at this stage in the investment cycle (depression expected, but before its onset) is that people see a price fall in the TV news, and panic. They say "oh noes, this is the beginning of a recession, it's all down from here", and they bail out. And of course, the next day, the market goes back up and marches upward for another month, while they put nose-marks on the candy store's glass window. We don't want you to do that.

On the other hand, if you really, really study market cycles, and you know exactly what the curves and indicators look like for the past 20 recessions, and you know all about the false indicators too... And you look at the market on a particularly high day and go "now's the time" and sell... That's more the way to do that thing.

Then, you better know when to step back in, and that's a lot easier - everytime the TV news shows pictures of brokers jumping out of windows and Mad Max driving down Wall Street, buy.

This is called "Wall Street having a 2-for-1 sale".

It's still "timing the market", which is considered bad. But keep in mind it's considered bad for a reason; it is highly speculative, and brokers don't want to be sued by their clients for guessing wrong, a viewpoint always taken in 20/20 hindsight. To avoid that liability they created that old chestnut "don't try to time the market".

Obviously, your friends who lost it all in the 2008 recession bailed out after the drop, but failed to buy back in at the bottom because they feared it would only go lower and lower forever, and were emotionally put off by the volatility: they became afraid of the market. They broke both rules: buy low, and sell high.