Should You Hold or Go to Cash in this Market?

With Monday’s bloodbath in Asia and in Europe, investors want to know what should they do? Should they panic and sell everything and move into cash, or should they hold on and keep absorbing large market losses?

Obviously if I actually could predict the future, I wouldn’t be blogging. Rather, I’d be sipping some kind of drink with an umbrella in it. But while none of us can see into the future, examining data from the past may help us shed some light on the current market situation.

An interesting article appeared in this weekend’s Seattle Times which spoke about previous market reactions to recessions. Whether we are in one or not is subject for another post. According to data dating back to 1953, recessions, on average, last 216 days, or just over seven months, and stocks post an average 8.64 percent decline during the first half of the pullback, according to Citigroup (C). That actually doesn’t sound too bad compared to the 16% we are down from high in October. Anyway, we are about half way through this cycle.

So what’s the good news? While the first half of a recession can punish stocks, the second half tends to reward investors. During the nine recessions dating back to 1953, S&P 500 stocks have gained 13.17 percent on average in the latter half of a recession, according to Citigroup.

Let’s hope history repeats itself again this year.