The Coronavirus is winning; global stock markets are losing. The Dow Jones is down 7.5% for the year, and volatility has spiked. In uncertain times, investors sell stocks to buy safe investments like U.S. Treasuries, CDs, or money market funds. Investors are seeking a port in the storm.
Does it make sense to sell stocks? Maybe. Here are seven reasons to sell.
- You’re 100% invested in stocks. If you’re allocated 100% to equities, sell shares to add bonds or cash to your portfolio. The bonds and cash will lower the volatility in your account.
- You need the money in one year or less. Stocks are unpredictable in the short term. On an annual basis, stocks finish in positive territory 73% of the time. Over twenty years, they have never lost money.
- You need the money for a new home, to pay for college, buy a new car, or some other purpose. Invest in short-term bonds or keep your money in a money-market account. Liquidity is paramount.
- Your risk exposure is too high. Last year, stocks soared. If you didn’t rebalance your account, your stock exposure might be too high. For example, if your target equity exposure is 70%, and it jumped to 80% last year, sell 10% of your holdings to reduce your risk.
- Your goals have changed. If your financial goals changed, adjust your asset allocation to meet your current needs.
- You’re retiring this year. If this is your year to retire – congratulations! If so, buy bonds to cover three years of expenses, so you don’t have to worry about the stock market volatility. If your annual expenses are $100,000, purchase $300,000 in bonds.
- You’re donating your shares to charity. Donating stock to charity is not a sell, but a transfer. Regardless, you’re reducing your equity exposure. If you have appreciated securities or a concentrated position, consider donating your shares to your favorite charity. Your donation will lower your risk, but more importantly, you’ll help those in need. And, there’s always a need.
Selling from a position of fear has historically been a poor decision because stocks recover. When you react to volatility or a drop in prices, you’re probably selling near a bottom. If you sell your shares, when do you repurchase them? Uncertainty is a central theme for investors, and we never know what’s going to happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill is yielding .58%. The inflation rate is 2.49%, so if you invest your money in the T-Bill, you’re losing 1.91%, before taxes. Does it make sense to lose 2% per year while you wait for stocks to recover?
A financial plan will help you focus on your goals and your investment allocation. Most financial plans model for stock market drops through Monte Carlo simulations. Money Guide Pro, for example, will run a thousand scenarios to determine the soundness of your plan. It’s better to be partially right than completely wrong. The recent market swings have been wide, but, so far, it is not having any impact on our client’s financial plans.
If your time horizon is three to five years or more, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but if you dare to do so, you’ll be happy when prices rebound. Will people stop buying cell phones or hamburgers? I don’t think so, so take advantage of people’s fear to add to your stock holdings.
Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. The Coronavirus will eventually pass as did SARS, Ebola, and Zika. And, unfortunately, we will have to battle another villain that will drive stock prices lower.
Create a plan, focus on your goals, think long-term, and good things will happen.
Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthews 6:34
March 4, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 Morningstar Classic Year Book – 2015