Too Late to Sell?

The Dow Jones is down 18.8% for the year, so is it too late to sell? Investors have sold $34 billion in equity mutual funds and $17 billion in bond funds as they seek safety from the rout in global assets.[1] The news is ominous, and the headlines are bleak. Investors are voting with their dollars, and it’s clear they don’t want to own stocks.

In December of 2018, investors sold $133 billion in funds before stocks rose significantly in 2019. In October of 2008, investors liquidated $128 billion in mutual funds, a few months before one of the great bull markets in history.

It’s never too late to sell because stocks can always fall further. William O’Neil, the founder of Investor’s Business Daily, recommends selling your shares if they fall 7% to 8% because a small loss can turn into a big one if you don’t cut your losses. He said, “You don’t want to take a loss, so you wait, and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.” Enron shareholders had the opportunity to sell their shares at $90, or $80, or $70, or $60, or $50, or $40, and so on before it traded to zero. I’m sure investors in Enron would have loved to sell at any price above zero, regardless of their cost basis.

An investor who sold their holdings in August of 1987, avoided the stock market crash on October 19, 1987. If you knew the Oil Embargo of 1973 was coming, you could have sold your stocks in 1972 and avoided a 41% drop in the S&P 500 from 1973 to 1974. If you sold your shares in 2007 before the Great Recession, you missed a 50% drop in the market. Of course, selling before a correction when stocks are at an all-time high is difficult, and predicting the future is impossible.

When stocks are falling, emotions transcend facts. Not many people care that stocks produce superior long-term results when their accounts have lost 20% in a few weeks.

It’s easy to look in the review mirror and say what you would have done, but what should you do today? Should you sell? Here are a few suggestions to help you decide.

  1. If your stocks are keeping you up at night, then sell your shares. If you’re losing sleep, you own too many stocks.
  2. If you need your money in one year or less, do not invest in stocks. My nieces and daughter must use their money to pay for tuition, room, board, and books, so they invested in a money market fund. I don’t need my retirement money for 10 to 15 years, so I’m 75% invested in stocks.
  3. If you’re retiring in the next two or three years, invest in U.S. Treasury Bills to cover three years’ worth of household expenses.
  4. If you don’t have a safety net, sell stocks. A recommended safety net is three to six months of expenses. If your monthly expenses are $10,000, keep $30,000 to $60,000 in cash.
  5. If you have high levels of debt, sell your stock to reduce your obligations – returns are fleeting, expenses are forever.
  6. If you need money to purchase a home, car, boat, plane, or any expensive item, sell your stocks and move the proceeds to cash.
  7. If you’re 100% allocated to stocks, reduce your equity exposure, and sell some of your holdings.
  8. If you know stocks are going to drop 20% tomorrow, sell today.

With the drop in stock prices and interest rates, bonds may be a riskier investment than stocks. The current yield on the 30-Year U.S. Treasury is 1.5%. The ten-year average Is 3.1%, and if rates rise back to the average, bonds will fall by 20%. In 1980, the 30-Year U.S Treasury yield peaked at 15.08%. If rates returned to their all-time highs, bonds would fall 75%![2] The iShares 20+ Year Treasury Bond ETF (TLT) is up 26.3% for the past year, but it fell 10.5% this week as interest rates rebounded from their remarkable lows.

Money market funds and savings accounts offer low rates. The one-month U.S. T-Bill is yielding .33%.  The current inflation rate is 2.33%, so you’re losing 2%, before taxes, to park your money in a safe account. Cash accounts and short-term bonds are not sustainable solutions for creating wealth over time.

The Dow is down 18.7% year-to-date and off 9.8% for the past year. It’s up 30.6% over the past five years, 118% for the past ten years, and 9,390% since 1930.[3] It’s impossible to know what stocks will do tomorrow, but over time they will rise.

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%.

Is it too late to sell? If selling your stocks will bring you peace, then sell. However, stocks have always recovered, so make sure you’re selling for the right reasons and not from a position of fear.

Be strong, keep the faith, follow your plan, think long-term and good things will happen.

We have nothing to fear but fear itself. ~ Franklin Delano Roosevelt

March 15, 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.

 

 

 

 

 

 

 

 

 

 

[1] https://ici.org/research/stats/flows/combined/combined_flows_03_11_20, Website accessed 3/14/2020.

[2] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[3] YCharts