It’s our new normal. The question is always the same. “Is it time to sell? The market is just going down, and I think it’s going to continue to get worse. It’s really hard to watch. So, is it time to sell?”
Our answer is that selling is quite possibly the worst thing you can do right now. Frankly, it’s too late to sell. The market has already dropped 20%. If you sell now, you lock in those losses. And then you’ll have to determine exactly when to get back in so you don’t miss the recovery. Realize that by the time you see big market moves, it’s too late to benefit. The old adage still holds, “If it’s in print, it’s in the price.” News you read or hear has already been reflected in the price of stocks.
Also, keep in mind that our current market levels are just slightly higher than those from December 2018. Remember how companies started cutting their 2019 forecasts, and we experienced the worst December market since the Great Depression? But then look what happened—in 2019, the S&P 500 Index was up more than 31% when earnings were stagnant. You simply cannot predict the market in the short-term.
It might feel like the sky is falling, but it’s not. Step back and get some perspective as to where exactly the market is. If your portfolio falls 10%, it must increase by 11% to break even. Likewise, if it falls 50%, you need it to go up 100% to break even. If you earn 5% each year, it will take you 15 years to break even after a 50% loss. If you earn 10% a year, you will break even in eight years. No one ever said there was a short-term solution to the problem.
In our opinion, one of the best things you can do is buy systematically. Even if you believe the market is going to continue to fall, we believe trying to time the market is a fool’s game. We firmly believe in dollar-cost averaging money into the market, investing fixed dollar amounts at regular intervals.
Hopefully, you are following an investment philosophy like the Ten Year Rule, so you have 10 years of liquidity in fixed-income investments that should protect your principal. So, if you do not need to sell stocks to cover your spending needs, we believe the stock market is the place to be for long-term investments. Rely on the criteria you set for purchases and sales. When a stock’s price is plummeting, examine the company to see if any events have triggered your sell criteria, such as a change in the company’s long-term fundamentals, a change in the company’s business model or management structure, or a change in the company’s financial strength.
So, let’s say you have been saving, prior to the crisis, and you have $50,000 you want to invest. We recommend dollar-cost averaging $10,000 over the next five months. You will capture both lows and highs, generally obtaining a better price per share over the long term. This occurs because you buy more shares when prices are low and fewer when prices are higher.
Many high-quality companies have been beaten up by the recent volatility. We believe investors would benefit from buying stocks that pay dividends. We also think oil companies should do well going forward. Crude oil prices are currently below what global producers need to maintain their economies, so we believe they will have to cut production, which should result in oil prices going up.
Often the hardest thing you can do is nothing. Choosing to do nothing is an active investment decision. Ideally, you have a plan. In times of crisis, people want to do something. They want to feel active and make decisions over something they can control. This is probably what leads people to hoard toilet paper. Since no one can predict the future, your best choice when it comes to investing is to stay the course with the plan you made while not under stress, specifically for tough times like this.
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