Worldwide Success

As we navigate through a bear market territory, many people are wondering if it is time to pull out of the market and sell stocks.  The old adage on Wall Street is that market volatility is caused by two opposite human emotions: fear and greed.  In times like today when bad news are all over the media, fear is the most prevalent emotion, driving steep declines every time a new piece of bad news is announced.  Pick up the newspaper and you will see a barrage of articles emphasizing the current economic crisis: recession, inflation, foreclosures, bankruptcies, bank closures, credit squeeze, high cost of gasoline, layoffs - you name it - it is bad new everywhere you look.

With all these bad news, and the current recessionary environment, you are probably - and rightly so – asking yourself:  why should I stay invested?  Is it time to sell stocks?  The answer is simple.  First, it’s been shown again and again that even the best investment professionals who have an entire army of analysts working for them cannot accurately time the market.  So what makes you think that you as an individual investor can do a better job?  Second, by the time most people recognize and agree that we are in a recession, usually the market forces are already working in the opposite direction.  And since the markets are always looking forward several months in advance, you may be pulling out just as the markets are about to rebound.

In order to win in the market timing game, it would not be enough to be good at it.  You would have to be near perfect.  And the penalty for being just a little bit wrong is very steep.   Let’s look at an example:

In the 10 years between 1998 and 2007 if you had stayed invested in the stock market throughout the entire period you would have gained 5.91%.  However if you had missed out on the market’s 10 best days out of the approximately 3,650 days available in the entire period your return would have been only 1.12%.  If you had missed out on the 20 best days you would have achieved a negative return of -2.54%.  Missing out on the 30 best days would have resulted in a -5.67% return.  Let’s summarize this for you in simple words:

In the 10 year period between 1998 and 2007, being only 99% accurate in your market timing attempt could have had an unfavorable double digit impact on your return.

As has been said many times here at Worldwide Success, if the current market gyrations and the recent 20% decline are keeping you awake at night, instead of moving in and out of the market based on irrational, emotional decisions, what you need to do is rebalance your asset allocation to better align it with your risk tolerance.  In other words, if the prospect of losing 20% of your invested money is having an impact in your quality of life, add more conservative assets such as bonds and cash to your investment mix in order to reduce the volatility of your portfolio.

Going back to the question in the beginning of this article:  Is it time to sell stocks?  The answer is yes, but only if you are selling to rebalance your asset allocation to a more comfortable mix.  Selling with the intent of getting back in the market when things get better has been proven again and again to be unlikely to yield the results that you are expecting and will most likely have a negative impact to your investment return. 

If you have the stomach to deal with losses of 20% or more, this may actually be an opportunity to buy stocks at much lower prices than they were just a few months ago, likely boosting the long-term return of your investments.  So if you are comfortable with the risk-reward balance of the asset allocation in your portfolio, the answer is definitely no.

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