Expert Financial Advice; What Not to Do With Your Investments Now
Is it time to sell your stock investments?
If you have a workplace retirement account or brokerage account with investments in the US stock market you may be tempted to sell now. Markets are unpredictable and volatility is scary.
Volatility is the Price You Pay for Returns
Investing 101 informs that you need to take some risks in order to be eligible for a larger return. The problem with that reality is that no one enjoys seeing their investments decline in value. Even if you don’t know anything about investing or understand the mutual funds in your retirement account, you understand a 5 year annual 16.31% gain in your Vanguard Total Stock Market ETF (VTI). You realize that a 16% return is much better than the 0.60% return you’re earning on the cash in your savings account.
Not only are investors usually happy with double digit gains, but after large gains, their anxiety and fear frequently kicks in.
What if the stock market declines? There’s discussion online that investment markets are over valued. Most investors are okay with volatility as long as it is going up!
After a nice run up like the past 5 years, you may be tempted to sell and take some profits.
Glancing at the 5 year chart for the SPDR S&P 500 ETF Trust (SPY), an index exchange traded fund that mirrors the S&P 500, you’ll notice that 5 years ago, on October 24, 2011 the fund was trading at $128.60. On Friday, October 21, 2016 the fund closed at $213.98. That’s a 66% gain over the past five years.
Should You Capture Some Gains in your Investments Now?
The answer to that question depends upon several factors. Will you need the money in your investment account within the next 5 years? If so, definitely, take some gains. In fact, if you needed the money in your investment account within 5 years, it shouldn’t have been in the stock market in the first place. The stock market is way too volatile for any short term funds.
If the funds in your retirement account are for long term goals; retirement, college for junior in 13 years then you may be wondering, “Is it a good time to sell and capture some gains?”
That question requires two separate decisions. Obviously, you could sell and take some profits off the table. But with interest rates in the basement, your cash would get eaten up by inflation over the next 10+ years and be worth a lot less when you really need it.
So here are your investment questions:
Question one – Should you sell now?
Question two – If you sell now, when is the best time to get back into the stock market?
If you sell now in an attempt to capture some gains, and the market declines a bit, you’ll be quite proud of your decision. But how will you know when to reinvest your funds into the market?
That’s the real problem, how will you know when the market is ready to rebound after a decline.
The answer is, you don’t know. The greatest gains in the stock market are made in a proportionately few days. If you miss the best 3-5 weeks in a year, you may miss the majority of gains for the year.
Timing the market, or jumping in and out requires you to judge correctly twice, once in when to sell, and the second time, when to buy.
Michael K. Farr dug into this issue recently in a CNBC.com article, “Should investors move to cash and hide out until the election is over?” He reported on a JP Morgan study that reminded investors that the annual S&P 500 return from 1996 through 2015 was 8.18% annually.
Yet, if you tried to time the market, to miss the declines, your result would likely suffer.
If you missed the 10 best performing days during the 1996 through 2015 period, your annual return would have dropped to 4.49%.
If you missed the 30 best performing days during the 1996 through 2015 period, your annual return would have fallen to -0.05%.
Are you prescient enough to judge correctly twice?
How Did Market’s React During Times of Upheaval?
Notice the chart showing market movements after major world and US events. There’s no consistent market response to unpredictable economic or political occurrences. Trading in and out is a risky strategy to try and beat the market.
- Clinton’s impeachment-market’s went up
- Y2K-markets went down
- 911-markets went down and soon reversed upwards
- Iraq invation-markets went up
- European debt crisis-markets went up
What the Smartest Investors Recommend-It’s Not Market Timing
Investment professors (myself included), John Bogle (founder of the Vanguard Fund Group), and Burton Malkiel (author of A Random Walk Down Wall Street) advise investors to keep their funds in an asset allocation in line with their risk tolerance and stay the course. Over time, if you believe the US and global community will continue to prosper, then stay invested and accept that the investment markets are volatile and over time, have trended upward.
Readers, what are your strategies for dealing with the ups and downs in your investments?
image credits; Yahoo!Finance and http://www.cnbc.com/2016/05/18/should-investors-move-to-cash-and-hide-out-until-the-election-is-over-commentary.html
Parts of this article were previously published and comments remain.