Should I Sell My Stocks Until the Market Gets Better?
Client Question: Should I sell my stocks until the market gets better?
Advisor Answer: If you know exactly when the stock market will stop falling and start rising again then by all means invest whenever is best! Although many people pretend they can predict the future direction of the stock market, they are merely guessing (even if they are making educated guesses!).
Stock market performance cannot be predicted in the short run
There’s an old expression that goes, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” Many media outlets and analysts reference various economic indicators such as job growth, wage increases, manufacturing orders, etc. as rationale for predicting stock market performance. By its nature, the future performance of individual companies (and therefore the stock market) is unknown. The success of companies is dependent upon their future earnings, and future earnings depend in large part on the subjective preferences of consumers, which cannot be known with certainty. Having said that, academic studies have shown that the stock market tends to increase in value over longer periods of time. This is due to the generally increasing productivity of companies. For more information on how aggressively to invest your assets, feel free to read my previous newsletter titled, “How Aggressively Should I Invest?”
Would you sell a real-estate investment property if it decreased 20% in value?
This is a question I ask clients when they ask me whether they should sell their investments after a stock market decline. As you might expect, clients say they would not sell the investment property because they wouldn’t want to incur a loss, and because they expect the property will increase in value over the long-term. Psychologically, it feels different to sell an investment property at a loss than it does to sell a stock for a loss. The investment property feels more real to many people than a stock investment; however, the stock investment does in fact represent equity ownership in a company that is very real.
The average investor buys high and sells low
Many people have heard the old adage, “Buy low and sell high.” As I pointed out in the first paragraph above, this is easier said than done! In fact, investor psychology tends to motivate people to buy high and sell low, which is the exact opposite of what they should be doing. For example, many people were comfortable investing during the most recent 10-year bull-market while prices were increasing; however, they are far more hesitant to invest in the stock market after it has decreased in value. Perhaps more importantly, I have met with people who sold everything after the stock market decline in 2008 and never re-invested to capture the bull market. This shows that even after the stock market has rebounded, investors can be hesitant to re-invest.
Inherent in this very question of, “Should I sell my stocks until the market gets better?” is 1) clients want to sell after the stock market has decreased in value, and 2) they only want to invest after it has risen in value. Interestingly, if the price of a real-estate property had decreased, many investors would be excited to buy; this is not the case, psychologically, with the stock market even though both instances are more or less the same in reality.
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