Sometimes we are all tempted to sell off a stock that is declining rapidly, but there are many reasons why you should avoid that urge…
It’s only human nature to want to sell your investments in a down market. Why? Most of us are risk-averse and want to avoid losing more of our money. However, when it comes to investing, a logical approach and a long-term mindset are required to outsmart the short-term down markets. Before you decide to sell your investments, consider the following…
1. Every Recession Or Downturn In History Has Bounced Back
There have been approximately 33 major recessions in the United States since 1854 up until 2018. Of all these recessions, 100% of them have bounced back and surpassed former market highs. What does this mean? Recessions are a natural part of the economic cycle. In fact, some may even argue they are healthy when looking at the economy from a “big picture” point of view.
In other words, statistically, each market downturn has a 100% probability of coming back. Why guarantee a loss (or lower return) by panic selling when statistics lean in our favor? Rather than asking whether you should sell your stocks in a down market, the question you should be asking yourself is “Do you still believe in the companies you’re invested in?” Then, adjust your portfolio accordingly.
2. It’s Contrary To The Common Sense Of “Buy Low, Sell High”
Timing the market is, in and of itself, a bad strategy to begin with, but noticing when stocks are “on-sale” can be a great buying opportunity to grow your returns. It’s common investment knowledge to buy low and sell high. If you decide to panic sell your investments because the market has a bump in the road, you’re essentially following the opposite advice and “buying high and selling low.”
In a down market, hold to your previous research on your investments that convinced you to buy in the first place and wait out the storm. In fact, if your passion for your invested companies is still burning, consider doubling down and buying more while the market is “on sale!”
Even Warren Buffett, perhaps the greatest investor of all time, said “Be fearful when others are greedy and greedy only when others are fearful.”
3.You Miss The Opportunity For Bigger Gains
When is the best time to buy a stock? When it’s undervalued.
Down markets often provide opportunities to buy stocks that have a greater chance of being undervalued. After having done your due diligence on your investments, you may be able to capture even greater returns by purchasing shares in the down market and holding onto your current investments for the long term.
Even major companies like Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Facebook (NASDAQ: FB) may drop in price during a down market, but chances are they will continue growing due to the strong brand, following and healthy balance sheet after the storm weathers.
4. Occasional Down Markets Are Actually A Healthy Economic Event
The stock market is indeed in some ways a living and growing entity. Consider the following comparison to illustrate an important concept.
An athlete builds stronger muscles and greater endurance by regular exercise and intense workouts. However, an athlete training for a race that exercises regularly but never rests is as good as if they’d already lost the race. It’s common knowledge that with intense workouts, the body needs to rest and recover, to then return and repeat for continued growth. Over time, after regular workouts followed by regular rest, the athlete becomes stronger and stronger.
A runner who decides to run for an indefinite length of time sooner or later will slow down and stop, and perhaps experience greater health issues. In comparison, a runner who runs a distance followed by regular rest, then increases their distance each time can achieve regular and continual growth over time.
The same concept is true for shifting gears in a manual transmission car. As the engine speeds up in lower gears, it’s essential to shift up a gear to slow the engine down while picking up speed. Otherwise, you might burn out the engine while working it too hard in a lower gear.
So, what’s the lesson? Economies function in a similar fashion. In order for continued and intrinsic growth to occur, regular “rests” or downturns are necessary to eliminate market bubbles and adjust to intrinsic market prices.
How does this knowledge help you during a down market? Knowing how the market cycles over time can give you peace of mind that a down market is expected and can often be a healthy event that poses great buying opportunities.
5. You Lock In Your Losses
In most cases where investors feel the emotions urging them to “panic sell,” they are most often already at a loss to their investment; thus, they panic that they will lose even more. With that in mind, if you decide to panic sell your investments during a down market, you are guaranteeing your loss. Keeping a long-term vision and reminding yourself of why you invested in each company in the first place will help keep the long-term vision present and avoid selling for a guaranteed loss.
Emmet Savage, founder of MyWallSt, has beat the market by three times for over a decade, and gives much of his credit to market-beating returns to holding onto his investments for the long term, even during recession markets. When you do your research properly before deciding to invest, you have reason to hold onto great companies during down markets, and in a lot of cases, those companies end up providing double and triple growth returns.
When Should You Sell?
The question now becomes, when should you sell your investments?
The short answer is that it’s more of a personal decision than a universal strategy. Having said that, referring to your investment research and comparing it to the company’s current state will give you a good idea of how to respond.
Has something changed that results in you feeling the company is not a great investment? This may be a red flag to consider selling your investment and choosing a company that better aligns your strategy.
According to Warren Buffet, “Our favorite holding period is forever.” He’s also been quoted saying “if you don’t plan on investing in a company for 10 years, you shouldn’t own it for 10 minutes.”
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in some companies mentioned above. Read our full disclosure policy here.
Cameron Williams is a freelance writer on finance and investment related topics. Read more of Cameron Williams’ work here.