When to Sell Stocks: Argument #1 for Selling in a Stock Market Downturn — Panic is Sometimes Appropriate.
The conventional investing advice is that you should not give in to feelings of panic in a stock market downturn. You should stick with your strategy, you should Stay the Course. Keep the chin up! Show some fortitude! Be a man!
Or don’t.
Look. The Cowardly Lion was shivering and quivering and shaking and quaking when the Wicked Witch of the West sent those flying monkeys after him. For good reason! The Cowardly Lion had cause to be afraid of those monkeys. They were creepy as all get-out. He wasn’t wrong to panic. The poor fellow had common sense, that’s all. His common sense told him to run.
There are times to stick it out and there are times to panic. What I don’t like about the conventional investing advice is that it makes out like there is never a good time to panic. The conventional claim is that it is always a good idea to stick it out. That cannot be.
God created all the emotions with a good purpose in mind. He created fortitude so that we could stick things out when sticking things out is the right thing to do and he created panic so that we could panic when panicking is the right thing to do. Advice that argues that there are no possible circumstances in which panicking is a good idea is flawed advice. There are times when panic is appropriate.
In a long stock market downturn, those who panic first panic least.
When to Sell Stocks: Argument #2 for Selling in a Stock Market Downturn — Those Who Panic First Panic Least.
Say for purposes of discussion that you agree with Argument #1, that you agree that there are times when panic is appropriate. If that is so, when is the best time to panic, early in the stock market downturn or late in the stock market downturn?
Early is far better.
Those who panic early in a long downturn (the only kind in which panic would be appropriate) lose much less than those who panic late. If you sell early in a downturn, you will be worse off than if you had sold before the downturn began. But you will be a whole big bunch better off than those who wait until the end of the long downturn to give in to their feelings of panic. If you sell enough to bring your stock allocation down to a level at which you feel comfortable holding through price drops, your worries go away.
In a long stock market downturn, those who panic first panic least.
When to Sell Stocks: Argument #3 for Selling in a Stock Market Downturn — The Strident Rejections of Selling as a Reasonable Choice Are Rooted in a Different Kind of Panic.
Those who argue that it is never a good idea to sell in a stock market downturn are evidencing feelings of panic of their own. Why do they suggest that those who sell are dumb? Why do they suggest that those who sell lack courage or balance or patience or whatever? Why are they so intense in their rejection of the idea that feelings of panic are appropriate?
That’s fear talking.
They’re afraid that they should be selling too.
They want you not to sell and millions of others like you not to sell because it gives them comfort to see that lots of others are doing what they are doing and holding onto their stocks during a stock market downturn. Their advice is aimed at benefiting them more than it is aimed at benefiting you.
They are not going to cover your losses if you follow their advice and suffer serious financial pain as a result of doing so. You need to do what’s right for you. You need to examine why it is that you are feeling desires to sell and whether those are feelings that you should pay heed to or not.
When to Sell Stocks: Argument #4 for Selling in a Stock Market Downturn — Feelings of Anxiety Early in a Stock Market Downturn Are a Warning Sign.
Assume that you buck up like a good soldier and ignore those voices you are hearing telling you to take something off the table. What’s going to happen if prices continue downward? You’re going to freak, aren’t you? If you’re barely able to take a small hit, a big hit is going to wreck you. The very fact that you are even thinking of selling today tells you that you probably are not going to make it through a prolonged downturn.
Your feelings of panic are telling you something. They are telling you that you are over-invested in stocks. Whether you sell or not, you should not be ignoring those feelings. You should be figuring out why you are experiencing them and taking action to be sure that you do not come to feel them all the stronger in a deeper stock market downturn.
Buy-and-hold is a wildly popular investing strategy today. It is a sound strategy. But guess what? Most of us know next to nothing today about how to pull off buy-and-hold in a secular bear market.
Buy-and-hold became popular during the wild bull of the 1980s and 1990s. Lots of people say that they are going to stay the course through the secular bear that we appear to have entered early in this decade. But that’s just people talking. Those who purport to be buy-and-hold investors will find out if they really have what it takes only when we experience the rough part of a secular bear. Most of those purporting to follow buy-and-hold today have never yet been personally tested in any meaningful way.
We’re all shooting in the dark. That’s what it comes to. Those who say that they will hold no matter what are shooting in the dark. And those who say that they are wondering if perhaps they should take a bit off the table are shooting in the dark.
Who’s evidencing more emotional honesty and more emotional maturity, though?
My take is that it is those who are acknowledging their fears early in the stock market downturn who are evidencing more emotional honesty and more emotional maturity. Those who say that they will never sell in any circumstances either have not informed themselves as to what sorts of circumstances a secular bear can dish out or are in denial about their own likely responses to those circumstances.
You can’t trust what these people say. They are humans like all the rest of us. Their emotions influence their investing decisions. For now, their emotions dictate that they be dismissive of any concerns about what is going to happen in a prolonged stock market downturn. But who knows if they are telling it straight even to themselves, much less to us? Where did these people come from that they can claim to be above the normal human emotions, emotions that have caused investors to suffer oceans of pain in earlier stock market downturns? Were they born free of original sin?
Do you know what would give me confidence in the claims of those who say that they will never sell, no matter what? I would have more confidence in those claims if they were delivered with a more dispassionate tone. The words that I hear from them say “I’m not worried.” The tone that I hear from them says “I can’t stand even to think about this sort of thing!”
I don’t place too much confidence in the words that I am hearing from those who are dismissive of the idea of selling early in a stock market downturn. I don’t think you should either. If you’re worried, the odds are that you are worried for a good reason. You’re not a dope, right? You’re not by nature a worry wart, right? So why are you concerned?
You’re concerned for a good reason. Don’t let people too fearful to acknowledge that they too are experiencing fear talk you out of taking action on your legitimate concerns.
When to Sell Stocks: Argument #5 for Selling in a Stock Market Downturn — This Might Be the Big One, Elizabeth!
There’s a reason for your concern. It doesn’t follow that you should sell. If you sell every time you feel little feelings of panic, you are not going to prove to be a successful long-term investor. The reality is that the advice not to give in to feelings of panic is generally good advice. Armies don’t win wars by retreating every time they hear enemy fire. Sometimes the thing to do is just to march forward and let the battle be engaged.
Sometimes the thing to do is to turn around and find a safe place to hide until conditions are more favorable to your chances of winning the battle. The trick is figuring out which sort of circumstances you face with the particular stock market downturn at issue.
No one can say with certainty, of course.
We can inform ourselves of the probabilities, however. This is where I break ranks with the conventional investing advisers. Most take the attitude that because we can never be certain that this next stock market downturn is the big stock market downturn that we should treat it the same as all the others, that we should always stick it out because it is usually a good idea to stick it out.
No!
The odds change depending on the valuation level that appliesfor stocks at the beginning of the stock market downturn at issue. We have seen stock market downturns that begin at times of low and moderate prices. You know what? They pass. They don’t do too much harm to those able to stick with stocks for a reasonable amount of time. We have seen stock market downturns that begin at times of high valuations too. Those are different. Some of those pass. A good number of them wreck everyone going with a high stock allocation.
There are two different kinds of stock market downturns. Staying the course is not a good means of dealing with The Big Ones. With those, you want to cross over to the other side of the street as soon as you see one coming in your direction. Bruce Springstein once observed how there are times when we find ourselves “in the part of town where, when you hit a red light, you don’t stop.” Today’s P/E10 level is in the mid-20s. We are now taking a little trip through the part of town where, when you hit a red light, you don’t stop.
We are today at the sorts of valuation levels (this article was posted in March 2007) that sometimes bring on The Big One. It might be a good idea to cross over to the other side of the street in the early stages of the next stock market downturn.
When to Sell Stocks: Argument #6 for Selling in a Stock Market Downturn — We Don’t Know If This Is the Big One or Not.
It might be a good idea to cross over to the other side of the street. It might not. This might be The Big One. It might not.
Those telling you that you should not lower your stock allocation use that as an argument that you should not sell. If you cannot be sure that this is The Big One, you should hold to your current stock allocation, right?
No!
That makes no sense. If you think that there is even a small chance that this is going to be The Big One, you should lower your stock allocation at least a bit. We don’t know when The Big One is coming, but we know that it is coming. Even if we don’t see a dramatic price crash, we know that times are going to be hard for stock investors until prices return to more reasonable levels. So why do we even need to determine whether this is The Big One or not? We know that we need to lower our stock allocations before The Big One comes, and we know that it is coming someday in the not-too-distant future. So what the jeepers are we waiting for?
Let’s speak plainly. If you are going with the same stock allocation today that you were going with the last time stocks were selling at reasonable price levels, you should be selling until you bring your stock allocation down to a level that presents the same level of risk as the risk level you signed up for back when stocks were selling at lower prices and were a lot less risky to own as a result. Make sense?
The downturn that you are concerned about today may well be a passing thing. If you sell, you might from a short-term perspective come to wish that you hadn’t. We just don’t know how stocks are going to perform in the short-term and I don’t see that there is much constructive purpose served in trying to guess. So let’s acknowledge that those arguing that you should not sell from a short-term perspective have a good point. How about from a long-term perspective?
That’s what matters, isn’t it? Successful investors are investors who focus on the long-term. When stock prices get out of control on the high side, they have to find their way back to more reasonable price levels in the long term, do they not? So what is the argument for sticking with the same stock allocation when prices have gone zoom-zoom for too long? There is no reasonable argument.
When to Sell Stocks: Argument #7 for Selling in a Stock Market Downturn — It’s Only By People Like You Selling That We Can Work Our Way Out of This Mess.
I am not a fan o wild bear markets. There are people who like them. Those who enjoy wild bulls evidence a short-term investing perspective by doing so. The best market is a market in which stock prices increase by the amount of the economic gains of the underlying companies, no more and no less. When things go stark raving bonkers, like they did in the 1990s, returns are reduced for many years to come. This is something that I am supposed to be happy about?
The thing that makes wild bulls so darn frustrating is that they are self-perpetuating. Once prices get out of control, there are many investors who want them to stay out of control because they don’t enjoy the idea of taking a ride back to more reasonable levels. That’s why it becomes so common at times like today for “experts” to advise us not to sell in stock market downturns. They are trying to ingratiate themselves with investors blinded by fear and greed into ignoring the fundamental realities of long-term investing.
Who needs it? This sort of thing gives me the creeps. If I am going to put my hard-won savings on the line, I want it to be on the line in an investment, not in a gamble. When we need to bully people into ignoring their natural concerns that prices are going soon to return to more reasonable levels, we’ve turned stock investing into a form of gambling. I’m not interested. I’ll play the game again when it again becomes less of a game.
It’s you, the investor thinking of selling in a stock market downturn, who is the key to turning this thing around. Do you know the real reason why many investors want you not to sell? Because they don’t want to have to sell themselves. They know that, if people like you sell, that brings prices down, and, after prices come down enough, they will have to sell too.
Let’s call the whole thing off. Let’s stop playing mind games with each other, admit that we got more than a little carried away back there in the 1990s, and do what we need to do to bring prices back to where the economic realities say they should be. Let’s act in our own best interest and thereby act in the best interest of all other genuine long-term investors at the same time.
Investing is a community endeavor. The worst rise to the top in a wild bull because there is no price to be paid for irresponsibility during a wild bull. Secular bears are the time when the Normals again assert control. You are thinking of selling because you are a Normal. Go with that good and positive and natural and perfectly reasonable feeling.
Don’t sell too much. Don’t get into the habit of selling in each stock market downturn and then buying again when prices recover. That way lies madness.
Sell to the point at which you feel comfortable with your stock allocation in a long-term sense. Get your allocation back to where it needs to be for you to be taking on the same level of risk as you were taking on back when prices were last at reasonable levels.
Do that, and you will naturally possess the fortitude needed to stick with your plan through scary times. It’s the difference between the bravado being shown by those telling you not to sell today and the genuine confidence rooted in an understanding of how valuations affect long-term returns possessed by the investor who knows not only how to talk the buy-and-hold talk but also how to walk the buy-and-hold walk.
The Wizard of Oz pinned a medal to the chest of the Cowardly Lion in the end, did he not? Dorothy gave him a big fat smooch on the cheek, did she not? Sometimes the truly brave thing to do is the thing that those of weaker character are dismissing as “cowardly.”
There’s a voice inside you telling you to lower your stock allocation a bit. That’s the voice of a friend. Give that voice a fair hearing. Sell until your stock allocation is one that inspires in you not a phony and false and loud and tiresome bravado, but a lasting confidence that your investing choices make sense and thereby advance a genuine stay-the-course approach.