In response to a few reader questions, all relating to moving their investments into something safer:
Question #1: Why do you really want to sell? Can you predict future movements of the stock market? I can’t. If you could, then you should have known these collapses were coming, shorted these stocks, and made a fortune. If you bet big enough, you’d be retired right now and not reading this.
So you’re not psychic. Then why? The real reason you want to sell is that your investments have dropped by 20% and you’re scared it will fall further. Okay, so you sell. How do you know when to buy back in again? If you use the same logic, you’ll wait until the market has gone up 20% already and you don’t want to be left behind. That’s just another way of saying buy high, sell low. Not a great way to make money.
Question #2: When do you need the money? If it’s still over 25 years from now, then what’s the worry? I don’t need this money for three more decades. Do you remember what the New York Times headlines were 25 years ago? You can bet they were worrying about something. Time horizon is important; Stocks are called long-term investments for a reason.
If you need the money a lot sooner, then you might want to re-examine your risk profile. But I’d still avoid making a rash decision.
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Thank you for a positive post. If you listen to the media (they don’t know any more than you do) you would be selling everything and going to live in a cave. Now is the time to look for good companies that have good products and buy. Most people that do sell now will miss the upturn and as you say buy high and sell low. That is a sure way to lose money!
People have been completely shaken by the performance of the stock market this year. And its not because of the fact than a 20-25% correction has occured.
Word on the street is that the smart money is in Gold right now.
Great Advice- this will keep all the suckers in the market long enough for me to sell my stocks while they still have value.
The truth is people hold on to bad stocks too long in general. The wait and hold theory is for people who don’t mind losing their shirts.
Thanks for this post. I admit I am a little depressed when I look at my IRA, but then I look at my holdings in that account and smile. Everything is a solid company that is likely to turnaround. So I’m getting these stocks at a bargain price. I like the idea of looking at the fundamentals. If the fundamentals are still the same, and the company is still good, there’s no real reason to bail.
Don’t sell everything, but realize that some companies are going under and you should sell them if you own their stocks. Sell anything related to the financial sector or consumer goods, and buy into the energy sector and presious metals. Wait for a good day to sell, like today – right after the fed injected money to keep the markets running.
Just wanted to respond to John’s comment that “Word on the street is that the smart money is in Gold right now”. This would have been a great play a week ago. By the time the street is recommending an action, it’s too late!
As the post hints, if you have a long investment horizon, the right play at this time is probably to maintain your equity position. I would take this a step further by saying that if you have a long term horizon, now might be a good time to start thinking about moving assets from safer investments (gold/bonds/etc) to equities, to capitalize on lower equity values. I personally think that the market has 10-15% more downside to it – so my plan is to shift my bond fund assets to equities as we get closer and closer to realizing that 10-15% of additional downside.
Obviously if you have a shorter investment horizon, this would not be the right strategy for you.
I agree with you totally Jonathan. Fear is the worst reason to make decisions. I too don’t need my money for almost 40 years, and I can’t touch it until then, so why do I care?? I don’t know, but it is enough to keep me up at night watching CNBC into the wee hours of the night. We are all dealing with a sort of psycholocial/economic corporate terrorism right now. Hopefully, things will get better and I’ll get more sleep.
It’s times like these I’m glad I decided on an asset allocation using different passive funds (per Bernstein, Boggleheads, etc). No worries about timing anything. Just stick to the plan, rebalance when percentages get out of whack, no stress.
Well, maybe a little stress when I look at my net worth contracting like George Constanza at a swimming pool, but blog posts like yours are reassuring. 🙂
Someone above mentioned smart money being in Gold. GLD has been going up for a while now, and yesterday had a record breaking gain. As I said, I don’t try to time the market, but if I did I’d think it would be a bad time to buy gold. Just about every other asset is on a clearance sale and Gold’s at a high. But then again, what do I know?
Who knows which asset class will be the first to climb out of this mess, but maintaining a diversified asset allocation is probably the best way to cover it.
People forget how important the concept of “trust” is to the well-being of a country’s financial stability. In the past half-centurary, in spite of all the ups and downs, the entire world has relied on the the american financial system as being the most sound and transparent on the planet…whether it be the dollar, the stock market, the banking system etc.
The sequence of events that have taken place over the last several years has eroded most of that trust. Once international capital flows stop moving into the financial system, how can we expect the asset price increases we have been used to for the last half-centurary?
Excellent point(s) in your simple post. This is a great time for people to assess their tolerance for volatility/risk/losses, etc.
Keep up the great work!
I want to bail on my bank – WaMu. I want to know Johnathan’s thoughts on this since his account setup centers around WaMu. What’s he going to do? Bankrun or not?
I disagree with you Curt, not everyone in the financial sector is failing. The ones failing are those that knowingly exposed themselves to bad loans. Companies like Wells Fargo who own their mortgages are doing fine and in fact are thriving in situations like this because they can pick up distressed companies on the cheap and expand their core business.
Others like Goldman-Sachs are aggressively buying back stock to prevent a collapse because they have the cash reserves to do so. Still, they are limited to how much they can buy so you still need to be careful. Don’t be hasty and sell bad stocks of good companies, it will come back to bite you.
Yesterday I was interviewed by a WSJ reporter. The question was “how I am coping with the market downfall?” I scratched my head but couldn’t come up with any earthshaking insights for her. Because, there is nothing really changed in my life in the last six months. I save the the same, I work the same.
Then I tried to summarize why my husband and I are not affected by this recent market turmoil. I work for myself, I can’t be laid off. I have no dept except for our mortgage. I have cash reserves and don’t spend extravagantly.
I wish other people were so lucky. From where I am, it is very clear, earning by doing what you love is one of the important keys to financial stability: http://is.gd/2IGI
It is not easy to find your niche. It took me years and years. But it can be done.
I think your earning ability is far more important than the size of your accounts.
It is nice to have big savings, retirement accounts, but if you work on your earning ability, you can be really confident about your future.
if companies like lehman or citigroup who have experts of their own who give ratings of other companies but yet, fail to predict their own company downfall, i dont know much about us, the common fools.
one thing for sure….many people who were cashing out their 401K today due to retirement, have to reconsider their retirement date. They dont have the 30 year window that some of us have. Maybe they did, but this shit hits them again, 30 years later.
Ghost, I’m also thinking about it, but what’s the point? There’s nowhere else to go that offers their rates and actual physical branches all over the place. As long as you are under the limits of the FDIC insurance, what have you got to lose? I think about this every day, but the logical conclusion continues to be to leave the money with WaMu.
The stocks like Lehman, Goldman Sachs, Morgan Stanley that tanked have poor fundamentals and are too highly leveraged. If stocks with sound fundamentals are in your portfolio then you should not be concerned for the long run. If you have cash then now is time to buy companies with strong fundamentals as this turmoil means “stocks are on sale”.
See my Blog Archive for tips on “Total Stocks in Portfolio-Aug 17, “Boost Your Stock Returns With Screeners-Sep 06”. For market trend see my Blog Archive for “Charting Made Simple-Sep 07”
Answer #1: Because my fund dropped 40% when benchmarks in the same area lost less. So I have no faith in my fund manager.
Answer #2: I would like to have some money to left to enjoy the market when it does go up, rather than lose it all to my idiot fund manager.
Naveen: I feel the same way except for one factor: I have a lot of bills that auto debit out of my WaMu accounts and I have some pretty hefty bills come up soon. I’d be worried about my accounts being frozen or held up in red tape and causing me to miss my bill due dates, if even for a few days. 🙁
You’re right though, you this is the best deal and will be hard to replace. It’s going to suck if it happens – no doubt.
The only real reason to sell–other than needing the money–is that the price of the stock is outpacing the company’s expected growth, right? Eventually, the price adjusts.
ghost:
Pay off the huge bills now instead of waiting to be close to the due date. I was over the FDIC limit by a few thousands, so I quickly paid off credit card even if they were not due. Im lazy that way.
TL – That’s one benefit of passive funds, you don’t have to worry about if your fund manager is an idiot, will one day somehow become an idiot, or if he will quit and an idiot takes over. 🙂
But, that doesn’t mean you have to bail out of stocks. It just means you should switch your stock holdings into an appropriate index fund.
I always ask myself “Do I need the money now?” when making a decision on selling a stock and the answer I have is “No” most of the time (the exception is when I need to raise money to buy other stocks). So I basically keep buying even though some stocks have suffered badly recently. I am not a fund manager, so I don’t need the performance number to please anybody.
I don’t agree. Mainly because I use technical analysis as my investing tool.
Why do you really want to sell?
If stocks are in downtrend, I don’t want to keep them and watch how they fall. When I will buy them again? When the uptrend will emerge.
Of course I can’t guarantee this approach always gives positive results. It is probability, but odds are very high. Same like you use diversification to decrease your risk.
You also can’t be sure that in 25 years your stocks would rise that you will earn your money back, can you?
Jonathan, do you still recommend Index investing to folks who have time on their hands to construct their own portfolios? I believe the index is at the same level it was in 2000 so a decade of index investing would have almost returned 0%.
Wow, John, what you said just rang a bell with me. I remember thinking back in 1998 that homes hadn’t gone up for over 10 years and it looked like the right time to buy (I did buy about a year later).
And you’re right, the indexes haven’t really increased much compared to prices in 1999, when the DOW reached over 10K for the first time (I believe) in April. So we are now seeing only 11K. Probably it’s a great time to get into an index fund – right now.
John, agree with Mimi.
So S&P index funds haven’t gone anywhere in ten years, but what have the comparable active funds done during that time? And could you have picked out the few fund managers who managed to beat the index beforehand?
And don’t forget, there are other index funds that track other asset classes besides just the S&P 500.
People say that the market will be quite volatile for another year or so. If that’s the case, and you’re watching the market closely, what difference does it make whether to start investing now or one year from now?
I feel safer and will sleep better investing in CDs or bonds for now..perhaps dollar cost average a few high quality stocks as well. But that’s just me..