Recently I received an email from one of my readers and with permission, I would like to share with you some of the contents of that email:
” . . . it is very common to hear financial advisors spurt the merits of ‘buy and hold’, ‘hang on tight’ and ‘just be a patient, long term investor’. In fact, these are the words from my financial advisor himself.”
“Whatever happened to buy low and sell high. Why wouldn’t you experts know that the markets are overly expensive and get the heck out of the market? And what about these mutual fund managers that are paid millions of dollars? Why would they not know that markets are expensive?”
“I’m thinking of moving my portfolio to cash and sitting tight until market conditions improve. What is wrong with sitting out when things are dropping like a ton of bricks? I know 2% is not much but it’s certainly better than a 15% or 20% loss. Besides, I think the days of double-digit returns are long gone anyway. People have been screwed one too many times.”
Many investors may be in the same mindset, questioning the advice given by experts, the media and financial advisors. We are in a tough environment and many have blamed this recent downturn on sentiment, emotions and lack of confidence.
Five problems with selling today
- The first problem is that you are selling at a very low point in history. I’m certainly not saying it is the lowest point in history but we have not seen these levels for many years. Logically, there is a higher probability of upside in the next few years than there is downside.
- If you are getting out permanently because you cannot stomach the risk, the problem is you do not have much in the way of alternatives. GICs today range from 2% to almost 5%. If you take a look at bonds, according to Morningstar, bonds delivered a 2% year to date to the end of June 30. The other problem with bonds is that they may go down in value if interest rates start to increase.
- Continuing on point number 2, moving to fixed income not only realizes your paper losses, but also guarantees a long road to recovering those losses. If you lose 10% of the value of your funds, and then you re-invest the funds at 2%, it will take you over 5 years to get back your original investment. At 5%, it will take over 2 years to make up the loss. The best way to make up those losses is to stay invested or buy more to lower your average cost.
- If you are just selling temporarily to wait for a better time to invest, then you are trying to time the market. The problem is that you cannot time the markets consistently. A study by the Financial Research Corporation showed that there is a trend for investors to trade more frequently than practice a buy and hold strategy. In 2000 the average holding period for a mutual fund was 2.9 years. In 1996, the average holding period was 5.5 years. This same study showed that these same investors tended to chase performance buying the best investment of the last 3 months. There was 14 times more money going into the ‘best’ performing investments over the ‘worst’ performing investments. Yet, these same investors made 20% less money chasing hot funds rather than staying put.
- Selling today is typically an action that is motivated by emotion. There are lots of emotions out there and negative emotions dominate the investment industry. All you have to do is listen to the news, read the paper or check your investment statement to understand why. The unfortunate part of decisions based on emotion is that it causes investors to do the wrong things at the wrong time. We buy when we should sell and we sell when we should buy.
My two cents
Despite investors lack of confidence and concerns over accounting scandals, war and markets, I think there are many reasons to suggest better times ahead. While I do not know what the next days, weeks or months will bring us, the next few years should be better than the last few years.
Selling today my help you to sleep at night and work in the short term but given time, you will find that you are better off staying invested. Good luck!