Should I Sell My Investments?

As originally appeared in The Jerusalem Post on May 20, 2022.

Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. George Orwell

The world has gone mad. Gas prices have been heading a lot higher. Surging inflation is a global phenomenon. Just go to your local Israeli supermarket, and the cost of your “wagon” is much higher than it was a year ago. Interest rates are headed higher and wait for what that will do to the real estate market. Russia invaded Ukraine. I am certainly not a historian but, I don’t remember a time in the last few decades that there is a total lack of global political leadership. Investors are jittery and wondering how all of this geopolitical chaos will impact their investments.

How to proceed?

I have received numerous calls from clients over the last month or so asking if they should sell out their investment portfolio and sit in cash until the craziness passes over. The first thing I always remind people is that the world is usually a pretty crazy place with wars being fought in multiple countries, and plenty of political intrigue. As such my advice is to do nothing.

Both readers of this column and listeners of my podcast will not be surprised by this advice. I always preach that panic is one of the worst things an investor can do. It’s important to stay the course and follow the investment plan that you have created. To repeat, the world has always been a very dangerous place; pundits have always been calling for market crashes, and most of the time the market moves higher. I have had many clients over the years that try and maneuver their portfolios based on political events and how the anticipated events would play out. More than once the client was correct in the prediction but the portfolio used to try and profit from the events dropped anyway.

That’s not to say that a 20% market drop is fun, but long-term investors understand that these drops can happen. I saw a chart on Bloomberg that said the median stock market drop during a recession, is about 24%, so we aren’t too far off. Of course, past performance is no indication of future results. If fact if you are looking to start investing or have some extra cash, now may be a good time to invest.

Retirement investors

While I believe that most investors should just stay the course and do nothing, retirees are different. For retirement investors that don’t have a large net worth and can’t afford the possibility of a 20-30% loss, pragmatism should win out. For these investors, we may be entering a period of time where capital preservation takes precedence over capital appreciation and they should make some changes in the way their portfolio is allocated. I say this for 2 reasons.

They don’t have the luxury of time on their side and the ability to rebuild their wealth in the event of a market drop
Because the most important aspect of investing is being able to sleep well at night and not be nervous that a sudden market drop will wipe out your savings.

For these investors, it pays to lower stock exposure. It also means that they probably have a more aggressive portfolio in general than they should have. As I said, markets can drop any time and 10-15% drops are common, and if you don’t have the ability to weather that storm, you have no business having so much stock exposure anyway.

It will drop

Let’s say you disagree and think that you can accurately predict the market drop. Now what? For those investors hell-bent on trying to time a major market drop and profit from it, the classic way to play a market drop is by buying ‘put’ options. A ‘put’ is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. A ‘put’ option is basically a bet that the market will drop. If it does, the investor makes money. If wrong, the initial investment in the put is lost.

If you are worried that geopolitical events will cause a severe market drop then now is the time to speak with your financial advisor to make sure you have the proper asset allocation for your risk level and long-term financial goals.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.