When to Sell
“The markets are falling, when should I sell and cut my losses?” is a very common question in times like these. In fact, selling is exactly the opposite of what you should be doing as an investor right now. Why is it that with investments people always want to buy them when they are expensive (the market is rising), and sell them when they will get little for them (the market has fallen)? They wouldn’t do the same with nearly anything else.
As financial planners we look at investments differently. They are only a mechanism we use to help clients achieve their goals. They have no intrinsic worth other than that. This means that when we assess why our clients hold investments, the dollar value of those investments from day to day doesn’t matter much. If an investment portfolio is going to sustain a retired client by paying them an income stream over a long period of time, what it was worth yesterday, today or tomorrow is irrelevant, because we are not going to sell at any price. If an investment portfolio for a client is being used to accumulate wealth for retirement (so that we can use it to pay an income stream once retired) the daily value of the portfolio doesn’t matter because we are not going to sell at any price.
What we focus on and what we need you to focus on is what you are trying to achieve. We see an investment portfolio as an important store of value, and a means of accumulating wealth. The goal is usually to accumulate enough wealth to generate the income you need to sustain your desired lifestyle without having to work. In order to maximise the likelihood of achieving that you need to not make short-term decisions which will blow up the long-term strategy. You need to concentrate on the long-term objective rather than the short-term noise. You need to recognise how long your time horizon is.
In 2008 and 2009 in the depths of the Global Financial Crisis, regrettably I was unable to talk some people off the ledge, and in the end, they liquidated their investments (despite my trying really hard!). No doubt, even now they believe that “getting rid of Paul” was the best thing they ever did. But was it? Remember, Investment markets CAN fall (see here
If they found the intestinal fortitude to go back into the market, and they timed it appropriately, they may (with emphasis on the may) have had a positive result. If they sold out of the market into cash and stayed there, all that happened is they crystallised the losses experienced during the downturn, with no possibility of recovery.
I came across the following chart, which whilst based on US data perfectly illustrates what I am talking about (all credit goes to Morningstar)
By remaining invested, you will always achieve the best outcome, because you take the impossible task of timing the market out of the equation. These are not inconsequential differences either, over a 12 year period since March 2009, you would be nearly 6 times better off having remained invested, and nearly 50% better off than if you had withdrawn from the market for a year and then decided to go back in.
So when is the right time to sell? We would argue that the answer is never unless you must. By that we mean sell when things outside of market conditions require it, not in response to the market. More than a century of history including two World Wars, a Depression, countless recessions and dozens of significant market downturns teach us that the market will recover, it just does. We have not seen Coronavirus before, but we have seen this kind of market impact before. The market has had a shock, it is too late to sell out now.
I am no genius, but I do know that reacting in an extreme way to events like these will not provide the best outcome (that’s financial planning speak for don’t do it!). Unless you really need cash this year for some other reason hold tight, bite your bottom lip, it will be ok.
Stay safe everyone