Stop, Drop, and Hold
By: Kevin Slater
Goodbye 2018, hello 2019! So far the markets are keeping their New Year’s resolutions and delivering positive returns across the board. That said, for the same reason we practice fire and earthquake drills, it is better to have a clear response plan in place before something bad happens. This a good time to think about how long we wait out the warning signs, and when do we actually pack up the car and join the masses driving the wrong way on the freeway to get out of town? The markets have shown signs of wavering in their resolve, so when might we sell?
If you are expecting some sort of algorithm to answer that question, I am going to disappoint you with some far easier-to-understand charts. Assuming our definition of something bad happening is a drop in the market, here is the impact of selling stock and waiting to buy after the 20 worst market drops over the past 10 years:
For those more skittish and/or “more sophisticated” investors who sold after a medium sized drop (2%)—the numbers are even worse over the past 25 years. Keep in mind this included two major bear markets:
Bottom line: history suggests that when the market is falling, you are usually better off remaining calm, sticking with your response plan and staying invested.
Of course, none of us knows how bad things might get or for how long. For this reason, it important that we understand each client’s short-term cash needs. Like an emergency kit, we can keep sufficient cash on hand to address immediate needs while we evaluate whether we need to adjust our long-term plans. While we can’t control the timing or extent of bad markets, having a clear plan of action will help get through them.