The sky is falling and everyone is going to die because of the Coronavirus! Should I sell all my stock?
You will likely start hear all types of ads and scare
stories about the dangers of the “Market Roller Coaster” or the “Wall street Casino”.
The ads are put out by groups trying to
sell you something and convince you it is better and safer than the stock
maker. It not better nor safer over the long run.
Let’s break down both those analogies and see where they are
flawed. Like a Roller Coaster the Stock
Market has a lot of ups and downs. Both of them it can be quite dangerous to
get off before the ride is over. You would not jump off a Roller Coaster in
the middle of a ride and you should not jump out of the stock market in the
middle of your plan. Besides the ups and downs and danger of leaving the ride
early the analogy ends. Roller coaster are for thrills seekers, investing in
the stock market is actually the secure thing to do over the long run. Roller
coasters almost always end at the same point they start. The stock market when invested for the long run and pursuant to a plan
almost always ends at point much higher than the ride started.
What about the Casino analogy? There is actually very little
in common here, I will grudgingly say both involve “bets” with money. However
the casino involves betting with someone that always wins in the long run, and
any gains are the result of pure luck, and very little skill. The stock market on the other hand almost always pays out to the investor over
the long run. There is some skill that is easily acquired or can be hired
to help maximize returns, but there is
very little luck involved as long as you have a solid plan and stick to it.
So let’s look at the statements in the title. I am not a
doctor or a scientist but I am pretty sure the sky in not falling and we are
not all going to die, but if either of those are true, your stock is probably
the last thing you should be concerned about. So let’s assume neither of those
statements are true, look at what happened today and over the last couple of
weeks, take a breath and then decide if you should sell your stocks.
The Dow was down over 2,000 points today, almost 8%, and it
is down close to 20% from its all-time high. All the major indexes are very
near to entering Bear territory (down 20% from their highs) and we may be
seeing an official end to the longest bull market on record. Large fast drops in the market can be
scary, but if you have a plan stick to the plan. Timing the market does not
work in the long run, but if you are
going to do any “timing” you should time so you never sell when everyone is
panicking and the market is way down. Money
you have in the market pursuant to your plan should stay in the market
according to your plan. You should not have money in the market that you
plan to use in the next five to ten years, so todays blip, and the downward trend
of the last couple of weeks, should not bother or affect you.
Anyone that left
$10,000 in the market at the bottom of the last crisis saw that increase to
over $68,000 at its high point a little more than 10 years later. So even
if it fill back to $56,000 in the last couple of wee your still ahead $46,000
because you stuck with your plan. The next ten years may not be as good as the
last ten years, they may be better or they may be worse, but at almost all points in history the stock
market is far better shape 10 years later.
If you don’t have a plan, should you sell all your stock?
That depends on a lot of factors, but the first thing you need to do is develop
plan. My general rule is to not put
money in the stock market you are likely to need in the next ten years. If
you are retiring next year and need your savings to live off of and it is all
in the stock market you probably need to sell some stock. If you have everything invested in the stock
market, and are one paycheck away from losing your home you probably need to
sell some stock. It is not ideal to sell after such a drastic fall, but since
there is no way of knowing if it will continue to fall or bounce back quickly, if you have no cash you need to put a plan in
place to minimize selling even more stock at a lower price.
If you failed to plan, but still have a cash cushion and a
steady reliable job for the foreseeable future, then try not to sell now while everyone is panicking, but start
building your cash reserves overtime and as the market recovers. It is
important to do this so you don’t panic the next time the market heads down.
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