When the market experiences volatility, our phones often ring, and it’s always the same question, “Is it time to sell?”
The catalysts might be different, depending on the type of investor. Some called in early February 2020 when the market reached a new all-time high. Others called in March when the market was down 34% because of the coronavirus outbreak. Then there are those who call now because they’re worried about the election outcome.
These reactions are emotional responses. Investors are worried about their money. However, part of working with a financial adviser is to take the emotional response out of your investment decisions. An investment manager or financial adviser is there to help you develop and achieve the goals in your overarching financial plan. They are not there to call you about a new stock or tell you that volatility will be high in the next 30, 60, or 90 days. They are looking at your money for the next 10, 20, and 30 years.
When an investor begins working with one of our advisers, they develop a plan to reach the client’s investment goals. Within that plan, you define your fundamentals in an Investment Policy Statement. This includes your target asset allocation, your investment strategy, and the circumstances in which changes can be made to the portfolio. The investment policy statement is designed to ensure that both sides understand the scope of the manager’s decision-making authority and the guidelines on which investment decisions will be based. At Henssler Financial, this includes our sell criteria.
We believe investors should hold on to an investment as long as it meets their investment objectives. Our first hurdle for holding an equity investment is that it must meet our minimum criteria. We invest in companies with predictable earnings, serviceable debt, and attractive profitability. Fundamentally, we sell when a holding falls below our criteria. Tactically, we may sell when an investment no longer has the upside growth potential in its industry that its competitors have. We will also sell if there is a fundamental shift in a company’s strategy or when we see signs of management incompetence or dishonesty. However, allocations among industry sectors may continue unchanged as we replace the out-of-favor stock with more favorable companies in similar industries. We always maintain a diversified portfolio.
Our fundamental criteria for stocks help ensure we hold high-quality companies that have reliable earnings regardless of economic conditions. We will never say, “Sell out of equities.” It is not that we are not watching the market. When you see moves like Monday, down 5%; Tuesday, up 4%; Wednesday, down 4%, Thursday; up 5%, you must ask yourself, “Why?” If you cannot determine why or do not understand what is causing the volatility, your decision could be that you do not want to do anything differently. We have a plan, and we stick to it.
We often sell equities for a client’s spending needs when the market is up. If the market is down, we have the flexibility to wait up to 10 years before we need to sell because we follow our Ten Year Rule—any money needed in the next 10 years is invested in fixed-income investments to protect the principal. The market is inherently volatile, but the market will also eventually even out because fundamentals drive the stock market in the long term.
If you have questions regarding your sell strategy, the experts at Henssler Financial will be glad to help: