Stock market prices are high, and the pundits are saying it's time for the market to fall. But then again, maybe prices will continue to rise for awhile and then drop.
Or they may fall today, next week, next month or next year --- by a lot. And when that happens, it can be scary until fear subsides and calm returns --- which it always does --- but who knows when? Not I, that's for sure.
As a result, many individuals are getting scared about falling share prices, and the so-called experts are adding to the FUD factor, aka Fear, Uncertainty and Doubt.
Is it time to sell and head for the sidelines until the dust settles? Or should we stay the course and hang in there until the all clear signal arrives?
In other words, what's an individual investor in it for the long haul supposed to do? Well, this individual investor is doing nothing other than what he ordinarily does. If I decide to sell something, which I do from time to time, it will be so I am in position to buy something else that is deemed to be a better investment.
But staying diversified is always important so I won't load up on any single stock or sector. I will play put and take, and let the short term chips fall where they may. After all, one thing I know for sure is that nobody knows for sure what will happen to stock prices in the near term. I sure don't.
And three other things I know are that (1) over time stock prices increase, (2) dividends received on blue chip stocks now and for the foreseeable future will yield more than interest paid on bonds (or gold and CDs), and (3) that stock prices inevitably will fall from time to time, and sometimes hard.
The simple fact is that people who sell during times like this tend to stay away from buying again until prices have increased to heights greater than current levels. That is the classic playbook definition of what not to do as a long term oriented individual investor --- sell low and buy high.
Notes on Scary Markets From Your Sketch-Wielding Drill Sergeant says this:
"I want to talk to you about scary markets.
For the sake of this particular subject, I want to be blunt and a
little bit in your face. So for the next few minutes, please, just think
of me less as your friend and more as your Scary Markets Drill
Sergeant. O.K.? Great.
Now,
you may be saying to yourself, “Why is he talking about this now? The
markets aren’t even that scary.” That’s true. And it’s also true that I
can’t predict when the next bad market is coming.
But
I can predict that another bad market will come again, eventually. And
when it does, you’ll want to have a plan. That’s precisely why now is
such a good time to hash this out. Because you don’t wait until your
house is in flames to buy a fire extinguisher, right?
Let
me set the stage for you. It’s sometime in the near future. The market
just got really scary, like 2008 or 2009 scary. You and I are sitting
down together for lunch to talk about what you should do.
We’re going to
start with a couple of assumptions. First, you have a portfolio that
was built specifically and intentionally to give you the greatest
likelihood of reaching your goals. Second, your portfolio is down 20
percent or more, and you want to sell all of your investments and go to
cash because that feels safest.
But
before you do that, before you make this huge, drastic decision, I will
have a little conversation with you. Here’s how that conversation would
go.
Me: “Why are you invested the way you are?”
You: “Because this portfolio gives me the greatest chance of meeting my goals.”
Me: “Are your goals still the same?”
You: “Yes, they’re still the same.”
Me: “O.K., great. Step one, you own the right portfolio. Check.”
Let’s pause there a moment for dramatic effect and reiterate that you have the right portfolio. Back to the conversation.
You: “But I just can’t take it anymore! I’ve got to sell everything.”
Me:
“Got it. Now, just so I understand, if you do that, is that going to be
a permanent decision? In other words, are you getting out of the stock
market forever?”
You: “Well, no...”
Me: “O.K., then. So when do you think you are likely to get back in?”
You: “When things settle down!”
Let’s hit pause again.
Now we know three very important things.
■ You have the right portfolio.
■ You’re not going to abandon the stock market permanently.
■ You’re going to reinvest when things clear up.
Let’s
flesh this out a bit. I want you to imagine what it will be like when
things clear up. So why don’t you go ahead and answer just a few more
questions from your Scary Markets Drill Sergeant:
■ When the market clears up, will it be less scary than it is now?
■ When the market clears up, will the economy be better?
■
When the market clears up, will that guy on the financial pornography
network be telling everyone and their mother to buy more stocks?
■
When the market clears up, will all your neighbors and friends be
sitting around the barbecue grill again chatting about investing?
We all know the answers to those questions: yes, yes, yes and yes.
But
one last question. Drum roll please: If the market isn’t scary, the
economy is better, the guy on the financial pornography network is
yelling “buy, buy, buy!” and everyone you know is planning to invest,
how do you think the market then will compare to the market now?
It’ll be much higher, of course!
So,
to review: Your plan is to sell your perfectly tailored portfolio,
right now while your investments are down. Then, you’re going to wait
until the market improves. When it does, you’re going to buy back Plan A
at a much higher price.
To which I say: Seriously?
I
hate to be annoying, but I really want to hammer this conversation
home. It doesn’t make a lick of sense to sell a portfolio tailored for
you when the market is low, and then buy it back when the market is
higher. It makes infinitely more sense to simply keep your portfolio
through the scary times and tough it out. Right, soldier?
Instead
of doing what fear is making you want to do, just think back to your
Scary Markets Drill Sergeant and remember these three things:
■ You made your portfolio based on your goals.
■ It still matches your goals.
■ If you sell that portfolio now and buy it back later when the markets are better, all you will do is lose money.
It’s that simple. Just. Don’t. Do it.
Think of this as something of a lifeboat drill.
This is meant to help you remember that when the ship goes down and you
find yourself in the lifeboat scared and cold, you don’t throw common
sense to the wind and jump in the icy water. Just stay in the rescue
boat, tough it out through the turbulent times and wait until the next
big ship comes to pick you up to carry you safely to your destination."
Summing Up
Share prices fall by 10% or more at least every several years. When they do, they sometimes fall both fast and hard.
And there's nothing wrong with taking some money 'off the table' in anticipation of the decline. That said, have a plan for both getting out and getting back in later which is of the 'sell high/buy low' type and not the other way around. So if you sell, plan and wait to reinvest the money at a lower price than you get when selling. Ok?
Nobody knows when that fast and hard fall in prices will occur. And sometimes the unforeseeable happens, both bad and good. That's why it's unforeseeable and unforeseen.
That said, my present view is that the U.S. economy is improving somewhat and that a recession isn't in the cards for the next several years.
As for our U.S. debt, Fed interest rate increases and the overall political craziness, those are known and big problems. And with regard to future terrorist attacks, the Chinese economy, the Brexit issue, energy prices, and the deeply troubled economies of the rest of the world, who knows how markets will respond to whatever happens? Not I, that's for sure.
I also believe that share price valuations aren't excessive and that cash dividends paid on the stocks I own are yielding more than interest paid on bonds and alternative investments. And I never buy gold.
Thus, I plan to continue business as usual with respect to buying and selling a basket of diversified solid blue chip stocks which pay decent dividends from their stable earnings.
That's my call, and that's also my take.
Thanks. Bob.
Share prices fall by 10% or more at least every several years. When they do, they sometimes fall both fast and hard.
And there's nothing wrong with taking some money 'off the table' in anticipation of the decline. That said, have a plan for both getting out and getting back in later which is of the 'sell high/buy low' type and not the other way around. So if you sell, plan and wait to reinvest the money at a lower price than you get when selling. Ok?
Nobody knows when that fast and hard fall in prices will occur. And sometimes the unforeseeable happens, both bad and good. That's why it's unforeseeable and unforeseen.
That said, my present view is that the U.S. economy is improving somewhat and that a recession isn't in the cards for the next several years.
As for our U.S. debt, Fed interest rate increases and the overall political craziness, those are known and big problems. And with regard to future terrorist attacks, the Chinese economy, the Brexit issue, energy prices, and the deeply troubled economies of the rest of the world, who knows how markets will respond to whatever happens? Not I, that's for sure.
I also believe that share price valuations aren't excessive and that cash dividends paid on the stocks I own are yielding more than interest paid on bonds and alternative investments. And I never buy gold.
Thus, I plan to continue business as usual with respect to buying and selling a basket of diversified solid blue chip stocks which pay decent dividends from their stable earnings.
That's my call, and that's also my take.
Thanks. Bob.
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