Markets are reeling, and there are few places to hide. Investors are scared of inflation, rising interest rates, and the Ukraine war. This year, the S&P 500 is down 16%, and the NASDAQ is fairing much worse. Long-term bonds are down 22%, while real estate holdings have dropped 17%. Investors are selling stocks to buy safe investments like short-term U.S. Treasuries. In uncertain times investors seek a port in the storm.
Does it make sense to sell stocks? Maybe. Here are six 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. Bonds and cash can lower your volatility and allow you to buy stocks at lower prices through portfolio rebalancing.
- 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. However, on occasion, they do fall.
- You need money to buy a new home, pay for college, or acquire a new car. Invest in short-term bonds or money-market funds because liquidity is paramount if you need to meet financial obligations.
- Your risk exposure is too high. Last year, stocks soared and elevated your stock exposure. 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 change, adjust your asset allocation and investment portfolio to meet your needs. Regularly reviewing your financial goals is recommended.
- Are you retiring? If you’re retiring this year – congratulations! If so, buy bonds to cover three years of expenses to avoid worrying about the stock market volatility. For example, if your annual expenses are $100,000, purchase $300,000 in bonds.
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 most likely 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 will happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill yields 2%, and the inflation rate is 8.54%, so you’re losing 6.54% before taxes. Does it make sense to lose 6.5% per year while waiting for stocks to recover?
A financial plan can help you focus on your goals and investment allocation. Through Monte Carlo simulations, most financial planning models allow for significant stock market corrections. Money Guide Pro, for example, runs a thousand scenarios to determine the soundness of your plan, and it’s better to be partially right than entirely wrong when it comes to planning.
If your time horizon is longer than two years, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but you’ll be happy when prices rebound. Will people stop purchasing cell phones, hamburgers, or electric vehicles? I don’t think so, so take advantage of people’s fears to add to your stock holdings.
Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. Rather than worrying about the volatility, 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
May 9, 2022
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