7 Reasons to Sell Stocks.

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.

  1. 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.
  2. 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.[1]
  3. 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.
  4. 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.
  5. Your goals have changed. If your financial goals changed, adjust your asset allocation to meet your current needs.
  6. 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.
  7. 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.

 

 

 

 

 

[1] Morningstar Classic Year Book – 2015

Is Bad Good?

Global markets have dropped considerably the past three months. The Dow Jones has fallen about 8% as investors react to negative headlines about trade wars, Brexit, interest rates, and several other issues. They have been selling stocks to buy bonds or park money in a cash account. These remedies may feel good in the short-term, especially as markets fall, but over time it’s not a wise strategy.

Quantifying investor behavior is challenging. Calculating emotions in a spreadsheet is impossible. However, sentiment indicators try to capture this information.

Sentiment indicators are contrarian, by nature, and they tend to follow the market’s direction. If stocks rise, so do the indicators.

The CBOE Volatility Index (VIX), CBOE Equity Put/Call Ratio, the American Association of Individual Investors Bull-Bear Spread, and mutual fund flows are a few of the more popular sentiment surveys.

The CBOE Volatility Index, the VIX, is the fear gauge. When fear is high, it rises. On November 20, 2008, it peaked at 80.86, indicating an extreme level of fear in the markets. Stocks would fall for a few more months before rising 267%. The average VIX reading is 18.39. It currently stands at 21.63.

The CBOE Equity Put/Call ratio is an indicator utilizing options. When it’s above .7 investors are buying more puts than calls. Put buyers expect the market to fall so they’ll profit if it does. When investors buy calls, they expect the market to rise. If the reading is above .7, it’s bullish. Below .45 is bearish. The current reading is .79. On August 21, 2008, the put/call ratio was .39. Investors were buying calls because they were optimistic the market would continue to rise. They were very confident – too confident. The market fell 37% by the end of 2008.

Measuring mutual fund flows is another solid indicator for investors. When they feel secure, investors buy mutual funds. When they’re scared, they sell. From April 2016 to December 2016 investors withdrew $199 billion from equity mutual funds fearing a market drop. In 2017, the Dow Jones rose 24.33% – a great year for the index. In the past three months investors have sold $62 billion worth of mutual funds.

My favorite sentiment indicator is from the American Association of Individual Investors. When this indicator is high, investors are confident. On August 21, 1987, the indicator reached 66. Two months later the Dow Jones fell 22% – the worst one-day drop in its history. On January 6, 2000, it hit an all-time high of 75. Three months later the Tech Wreck would arrive. The NASDAQ index would fall more than 50% over the next two years.  One of the most pessimist readings ever recorded was March 5, 2009 when it touched 18.92. Four days later stocks hit bottom and started a nine-year bull run. Today the indicator is flashing a pessimistic warning of 20.90%. The historical average is 38.24.

These indicators are currently in negative territory, a positive for stocks. When pessimism and fear rise, stocks look more attractive. The market likes to climb a wall of worry.

Not to be left out of the indicator game, the New York Times ran an article about the 2019 financial crisis that hasn’t happened yet. The article appeared in their style section.[1] Business Week’s famous headline, “The Death of Equities” appeared in August 1979. Had you purchased stocks on the day it ran, you would have enjoyed a gain of 2,641%!

Ron Paul is also getting into the prediction business. He’s predicting a 50% correction that will “spark depression-like conditions that may be ‘worse than 1929.’”[2]

Of course, no indicator is perfect. A negative one isn’t always positive. It’s imperative to focus on your goals. If they haven’t changed, stay the course. It takes courage and fortitude to hold stocks when everybody is selling but owning great companies for the long haul is how wealth is created.

The big money is not in the buying and the selling, but in the waiting. ~ Charlie Munger

December 17, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html, by Alex Williams, 12/10/2018

[2] https://www.cnbc.com/2018/12/14/ron-paul-market-meltdown-could-spark-depression-like-conditions.html, by Stephanie Landsom

No Fear.

Fear and worry are paralyzing.   When I jump in the ocean I fully expect to get eaten by a shark especially if I go swimming during the Discovery Channel’s Shark Week.   When I go hiking in the mountains I know I’ll have to fight off a sloth of bears.  In Texas, every stick is a rattle snake.    Of course, my fears are unfounded.  I’ve not been eaten by a shark, fought with a bear, or stepped on a rattle snake.   Fear of the unknown will keep us from enjoying life and experiencing our big blue planet.

A person has a 1 in 3,700,000 chance of being killed by a Shark.  The odds of dying from the flu are 1 in 63.[1]   Sharks, alligators and bears each kill about one person per year according to a 2015 Washington Post article.   Venomous snakes and lizards kill around six people annually.   Approximately 48 people are killed by a cow or dog each year.[2]

A Bible search for the words “fear” and “worry” produced 351 results.[3]  Most verses with fear and worry are preceded by do not as in do not fear or do not worry.

So do not fear, for I am with you; do not be dismayed, for I am your God. I will strengthen you and help you; I will uphold you with my righteous right hand. ~ Isaiah 41:10

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthew 6:34

Investors appear to live in a constant state of fear and worry.  Here are a few views on how to overcome some common investment fears.

  1. Fear of a stock market correction. Diversify your assets to limit your exposure to a stock market correction.   Investing in bonds, small companies, real estate, gold, and international investments will cushion the blow from a stock market correction.   These additional asset classes reduced your losses by 44% during the 2008 stock market correction.[4]
  2. Fear of running out of money. Longevity risk is a concern.   To avoid this risk, invest in stocks.  The stock market has produced a 10% average annual return since 1926 while the bond market generated a return of 5.6%.  $1 invested in stocks is now worth $5,386.  $1 invested in bonds is worth $132.   Stocks outperformed bonds by a ratio of 40 to 1![5]
  3. Fear of rising interest rates. Rising interest rates will lower bond prices.   Invest in a bond ladder to protect yourself from falling bond prices.  A portfolio of bonds maturing every year will allow you to invest in both short term and long term bonds.  When a short-term bond matures invest the proceeds in a new bond with a higher interest rate.
  4. Fear of missing out. FOMO is real!  Don’t chase returns on a high-flying stock.   If you want to buy a stock after it has appreciated significantly, wait for it to pull back before committing capital.

Do not let fear keep you from achieving your financial dreams.  Plan for your future and good things will happen.

The only thing we have to fear is fear itself. ~ FDR

Bill Parrott is the President and CEO of Parrott Wealth Management.   For more information on financial planning or investment management, please visit www.parrottwealth.com.

Note:  Your returns may be more or less than those posted in this blog.

April 28, 2017

 

[1] http://natgeotv.com/ca/human-shark-bait/facts, website accessed 4/27/17.

[2] https://www.washingtonpost.com/news/wonk/wp/2015/06/16/chart-the-animals-that-are-most-likely-to-kill-you-this-summer/?utm_term=.e46cacf09197, Christopher Ingraham, June 16, 2015.  Website accessed 4/27/17.

[3] https://www.biblegateway.com/, website accessed 4/27/17.

[4] Morningstar Office Hypothetical Tool.

[5] 2016 Dimensional Funds Matrix Book.