As I’m writing this (first week in March), the market is in the middle of some obscene volatility thanks to the coronavirus that has started taking over the world like the second coming of Genghis Khan. The crystal ball is decidedly murky on this one, so no telling what things will be like when you’re reading this in April, but here’s hoping the zombie apocalypse chapter story you’ve read in these very pages hasn’t been a massive case of cosmic foreshadowing!
Something I’ve heard a lot in the last week from clients is: “should we be selling stocks?” Perhaps you’ve had the same thought yourself. Fortunately, there’s a straightforward answer to that question: yes, you should sell.
But, but....what about long-term investing and buying the dip and “the market will recover” and everything else people say? Irrelevant! Let me explain:
The stock market often gets likened to a massive gaming table, where one places various bets on whether things will go up or down, and your odds of winning are roughly the same as in roulette. In the short-term, this is absolutely true. The market is a crapshoot on whether it will be up or down any given day. But long-term (10+ years), market returns have an incredibly high correlation with valuation. All the day-to-day noise smoothes out, and you can actually predict with decent accuracy what long-term returns will be based on present-day valuations.
Because of this (and the fact that those long-term returns have tended to be a nice positive number), you get all your buy-and-hold maxims like “investing for the long run” and “you can’t time the market” and so on. And they tend to be true! For the most part.
So why then is our answer “yes, you should sell”? Because investing is also about psychology. Most individual investors sorely underperform the broad stock market indices. Why is that? Because of FOMO as stocks go up and a generalized FO-Everything as stocks go down. So they tend to buy high and sell low. In the industry, “retail flows” are used as a contrarian indicator. Not kidding - the industry tracks cumulative individual investor money flows and then uses it as a barometer for when to do the opposite.
One of the keys to successful long-term investing is to not freak out and sell at the bottom. Down 15% in a week (like the market was the last week of February) is painful, but it is not a bottom. In 2000, the Dot Com bubble caused tech companies to lose 80% over the span of a couple years. Non-tech companies lost about 50%. In 2008, the Great Financial Crisis dropped the market by almost 60% in about a year and a half.
If you were thinking about hitting the panic button at down 15%, hit it. Your investment allocation is clearly too risky for you to maintain a long-term investment discipline, so you will save yourself and your portfolio a lot of pain by selling now to a risk level that lets you sleep at night instead of watching it drop by 50% and then selling and watching it go back up without you.
Caveat: If the market is down 50% as you’re reading this, then maybe you’ve missed the boat and should just hang on for the ride at this point. If you’re unsure about what to do, drop us a line and we’ll get together and talk about it: firstname.lastname@example.org.
Also, consider a trip up to New England this summer...because nothing makes the coronavirus more palatable than a little Lyme disease.
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