We are clearly in a volatile market cycle. We should expect to see more large moves – UP and DOWN in the coming weeks. There are several factors that fuel the frothy trend: COVID lingers, War in Ukraine, rising interest rates, and a historic run of growth for many stocks.
During the next sharp drop in market values, many folks will be tempted to sell. It’s the easiest thing to do.
First, you get to DO SOMETHING at a time when things seem out of your control.
Second, you get the illusion that you have reduced the chance of a BAD THING happening by exiting your investments and sitting in cash.
If you stay in cash, the amount of cash will never go down, however, that cash will never grow, AND in times of inflation, the purchasing power of that cash WILL shrink over time.
So, the SAFE thing – selling out of investments during a fall in prices – actually creates a whole new sort of RISK for your investment goals. The risk is that you will not return to investments, will not growth the money faster than inflation over time, and will not have enough money to do the things you plan to do in 10, 15 or 20 years from now.
When you exit investments, you immediately create the challenge – When should I get back in? And this question is shockingly hard to answer.
In my 20 years in the financial service business, I have been through a few bad patches. I entered the business just following the Tech Crash of 2000-2001. I was there for the 2008 meltdown and for the Pandemic crash of 2020.
In all these cases, if you have a quality mix of investments with a reasonable diversification among company size, company location, and industry sectors, AND you stuck to your guns and didn’t sell out, your investments bounced back pretty well over three to five years. But not everybody had the courage to hold on to good investments and weather the storm.
That leads me to a research study that looked at what happens when people sell out during sharp market declines. The study, “When Do Investors Freak Out? Machine Learning Predictions of Panic Selling,” was based on “the financial activity of 653,455 anonymous accounts corresponding to 298,556 households from one of the largest brokerage firms in the United States.”
There were a few interesting findings:
- MOST interesting: the study found that 9% of the investors who panic sell NEVER return to reinvest in risky assets.
- Also interesting is the demographics of the people most likely to panic sell:
- Older than 45
- More dependents
- Self-identify as having excellent investing experience or knowledge
- Those who panicked, sold out, and then returned to investments tended to buy them at higher prices and after the recovery was well established.
All of this highlights one of my core financial planning philosophies. Focus on when you need the money.
- If you NEED the money before 24 months is up. Stay in cash to be SURE you have the money when you need it.
- If the money is for a goal in the FUTURE like 10, 15 or 20 years from now, then stay invested in stocks of good companies. History shows those investments will grow faster than inflation and give you more spending power when you need it down the road . . . if you are patient.
- If your money is invested for the Long Run in quality stocks, DO NOT worry about short-term headlines. Concentrate on the big picture.
It’s my belief that most families will be more successful staying patient to reach their long-term goals if they have a relationship with an experienced, well-trained CERTIFIED FINANCIAL PLANNER™ professional. A fiduciary planner – one who always puts the client’s interests first – and a planner that works on a fee, with no compensation related to products, is in a great position to give you excellent advice on how to reach your goals safely.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice. Follow this LINK if you would like to find a time for us to talk.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.