SHOULD YOU “SELL IT ALL”?

 

Global stock markets are selling off quickly. The price of oil is heading to$20 a barrel. A wave of energy company debt defaults is around the corner. Chinese growth has stalled. A few European banks have called on investors to sell everything except for government bonds. 2016 will make the subprime crisis of ’08 look like childsplay. The big question for investors is whether they should take the advice of those European banks and sell everything and move into cash. After all, you can always buy stocks back when the market goes up.

 

Panic doesn’t pay

Mitch Tuchman on Marketwatch writes, “Without delving too deeply into the track record of economists (or anyone else) in predicting the stock market, it’s worth remembering that the biggest risk people run when investing is not in taking too little action, but too much.” He adds, “The short answer is this: The little guy gets creamed. The typical retail investor saw a return of 2.5%, just a hair above inflation, over the past two decades. The S&P 500 returned 9.9% annualized.”

 

I have heard stories of terrified investors selling out their entire portfolio as they are afraid of the market “crashing.” Is that a rational decision?  Investors get spoiled when markets continually go up, but a 10-20% drop is relatively common and actually healthy for the stock markets long-term prospects.

Long-term outlook

Long-term investors shouldn’t get caught up over short-term market gyrations. Markets drop, but after each drop markets recover, sometimes immediately, and sometimes it takes a bit of time, but the recovery happens. Just take a look back at ’08. After the 35%   drop the market proceeded to triple over the next 6-7 years. Those investors who wait on the sidelines until they receive some kind of “indicator” that the market is headed higher are inevitably the ones who lose. That “indicator” usually comes after the market has made a huge recovery, and they missed it.

 

Along those same lines Tuchman goes on to say, “But another big part of the problem is market timing, that is, reacting to headlines that scream “sell everything.” If you want to hear that, there has been no shortage of market prognosticators making the same warning. In fact, they have been saying it for seven years running, even as the stock market busted to new highs over and over. The history of investing is full of years when absolutely horrific, frightening events took place, wars, scandals, social unrest, and yet stocks put on steady gains. Taking the current headlines and making them into a reason to sell is a tactical mistake.”

Scared?

It’s certainly not fun watching your net worth drop significantly. I am not downplaying investor fear. But it goes without saying that money invested for growth should be money that you can afford to lose, because in the short-term no one knows if the market will go up or down.  If you can’t stand the volatility of the markets up’s and down’s then change your asset allocation. Take your foot off the gas pedal and buy some fixed income investments to make your portfolio less aggressive. But please do yourself a favor and don’t panic, sell everything and just wait on the sidelines.

 

In closing I would like to repeat advice that I have given countess times to clients and written in this column. I have been asked what I believe is the secret to building wealth. I answer that it’s to buy quality assets, whether stocks or real estate, and just hold on to them. If you can buy them at a 20-25% discount, more power to you. But if not, just keep on buying solid assets and saving. That’s the secret to long-term wealth building.

 

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.