The Risk of Selling

March 16, 2020

 

Because of the events of this weekend, the U.S. stock market will likely open tomorrow down from Friday.  Where it will end up by the end of the day is very uncertain.  All of us in the world want safety, and 10% daily swings up and down do little to calm anyone.  All I can do is offer perspective that is guiding our recommendations and my own personal investing decisions.  I’ll share three thoughts, some of which are repetitive, yet might be worth restating.

 

Looking Forward

 

With all the news happening right now, I know it’s difficult to see past the next few weeks and months, but the time horizon for your investments is far beyond that. There will be a lot of personal and economic loss in the near future, but the question is how well-functioning the economy will be, and what will be the resulting market values, at the time you need the proceeds of your portfolio.  I have my view that I’ve stated before – perhaps it’s later this year, perhaps it’s a bit longer, but we will reach a point where the health crisis is largely behind us.  Chinese companies are slowly resuming operations six weeks after their shutdown.  While it may take some time for those companies to be at full capacity, the recovery is slowly starting.  I don’t know if the U.S will recover faster or slower than China, but I do have faith that it won’t be years to recover.

 

If you believe there is some endpoint to this crisis, then what will stock market values be at that time?  Valuations are not based on past earnings – they are based on the future.  So, at whatever point the U.S. economy is fully recovered, there’s little reason to believe that stock market values will be much lower than they were at the start of the crisis.  But it will take some perseverance to get there.

 

The Decision

 

Even the steadiest of you has had to have asked the question “should I sell now?”  While we knew the likely answer beforehand, last Thursday our investment committee asked ourselves that question, and the answer was no (mainly for the reasons stated above).  But let’s say you are tempted – you then have to answer a second question, which is “when do I get back into the market?” If it’s never, then you are locking in today’s value, and for the remaining time in our investment lives resigning yourself to low money market and bond yields.  If the answer is “after the market comes back a bit,” then you are guaranteeing yourself a sell-low (today’s price), buy-high (the price after a rise in the market) strategy.  Those strategies are, by definition, guaranteed to lose money.  I measure true risk as the risk of an investor not being able to meet their goals.  To me, the “risk” of selling for most investors is far greater than the risk of staying invested in stocks.

 

Framing

 

It’s unfortunately tempting to calculate our losses from the high in the market a month ago.  But I ask you to look at your portfolio value today compared to the value at the start of 2019 (a year ago), or from the start of 2015 (five years ago).  Even after the recent drops in market, you might be comforted by your returns over any reasonable holding period. 

 

Commentaries are static documents and are general in nature.  Your advisor at Savant is there to answer your questions that impact you – your portfolio and your specific needs.  If you have specific concerns, please reach out to us.

 

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