It seems to me that every time the stock market goes down people get scared and want to change their investments. They sell stocks and buy more predictable investments like bonds. Part of the reason market downturns happen is because of people’s fear. People are fearful about oil prices or their afraid of China’s economic woes and they sell, sell, sell!
I’m here today to tell you that it makes no sense to sell off your investments when the market goes down. That stock price represents the value you would get if you chose to sell your investments. If you choose to hang on in the market, history tells us that the market has always gone back up. You get more bad consequences from selling out of fear than hanging on for the market to get strong again.
First of all, if you are selling investments outside of a retirement account you are going to owe taxes and money on the trades. Your tax rate is going to depend on how long you have held the investment as well as your income. If you’re selling that investment at a loss you need to think about the fact that taxes are going to add to that. Another part of the equation is it costs money to do trades. Just as it costs money to buy shares of stock or mutual funds it is going to cost you to get out of them.
Let’s not forget about dividends. Dividends are a cash benefit paid out to investors on a quarterly basis. The dividend is paid to reward investors for their loyalty to the company and for sticking with the investment. If you own dividend paying stocks you aren’t likely to see those go down if the market is low in the short term. Dividends may be changed by a company depending on earnings and the company’s financial state but they don’t get changed automatically if the market goes down. If you hang in there dividends add up over the long haul. Additionally, you can look up which companies have had solid dividend payouts for decades.
For another thing, it’s nearly impossible to time the market. Even professional money managers never quite know where the bottom or the top is. In economics this week we have been talking about the dart board phenomenon. This is where you take the financial section of the news paper and have monkeys throw darts at it. Which ever stocks get picked by the darts get invested in. In fact, it has been claimed in the book “A Random Walk Down Wall Street,” that the monkeys do a much better job picking stocks than humans do.
Before you go out and buy a monkey consider that generally more financially literate people do better in the market than clueless people. Yet we all have biases that cause us to make bad investing decisions. One of those biases is thinking we know when the market is “bad” or when it is “good.” The first rule of the stock market should be don’t make emotional decisions; in this respect the monkeys are likely to beat us every time.
When the market is volatile a lot of people don’t know what to do so hear this: do nothing. Sit tight. The only good reason you would have to sell your investments off would be if you’re old and you are going to need the retirement money in the next five years. If that doesn’t apply to you then its a dumb idea to take action.
Berkshire Hathaway (that’s Warren Buffett’s company) bought $400 million in oil stock this month. You can’t put all your trust in the actions of one company but I personally think that’s a sign the stock market is going to be just fine.