During the stock market’s wild swings lately, I read many articles in the media telling people not to sell in a panic. The message is consistent across the board — don’t sell. However, none of the articles advised that people should buy more either. In fact some articles specifically tell people not to buy more. For instance, Jason Zweig wrote in the Wall Street Journal Stocks Are Cheaper, but They Aren’t Cheap saying it’s not quite the time to buy yet.
I find the “don’t sell but don’t buy either” message quite puzzling because it doesn’t make a lot of sense.
Pick a date in the future. It can be five years, ten years, or 30 years from now. If you sell stocks now and do something else, there can be only two outcomes: stocks are either worth more than the alternative or worth less than the alternative (I’m ignoring the corner case when they are exactly equal, to the penny). For “don’t sell” to be proven as good advice, stocks have to be worth more — otherwise you should sell and follow the alternative.
If “don’t sell” turns out to be the winning strategy, you should buy more now because stocks will be worth more than the alternative. “Don’t sell” and “don’t buy” are in conflict with each other. “Don’t sell” implies “buy more.”
100% In Stocks
If someone is invested 100% in stocks, there is no money to buy more with. That may be the reason why all those articles only said “don’t sell” and not “buy more” but as you know, investing 100% in stocks is not a good idea.
Lower Prices Ahead
Some will say “don’t buy” because prices may go lower in the near future. Wall Street has this cliché saying “don’t catch falling knives.” If you think prices will be lower in the future, “don’t sell” is the wrong advice — you should sell now and buy back at lower prices later. “Don’t sell but don’t buy either” still doesn’t make sense.
Of course no one knows what the future will be. Stocks may not come ahead of the alternative. Prices may or may not be lower in the near future. With this uncertainty, if you are not comfortable with buying more, how can you be so adamant about “don’t sell”?
Stay the Course
“Stay the course” would be another explanation for “don’t sell but don’t buy either.” But staying the course doesn’t mean doing nothing. See Why Buy-and-Hold Isn’t a Good Strategy by Larry Swedroe.
You were on the course. The wind pushed you off it. Staying the course means you should take an action to get back to the course. That means buying more.
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I had a great conversation with a coworker on Monday. He was dead set on reallocating the funds in his 401K from stocks to the built in money market account.
I told him not to do it because the transaction wouldn’t be processed until the end of the trading day and by then, all of the “bad news” would already be reflected in the various stock indexes and it was “anyone’s guess” where the stock market would be the following day.
Anyway, he went ahead and sold his stocks at the close of business day Monday, only to have the stocks come roaring back Tuesday (essentially he lost about $20,000 by not listening to me).
My point to him was that he would never be able to time the market, especially with mutual funds where the transcation wouldn’t be processes until the end of the business day after the market already had plenty of time to adjust to any available economic news…
Ben @ Trees Full of Money
I sort of understand why some people may think “Don’t sell and don’t buy”. I am having similar hesitation.
“Don’t sell” makes sense to me now as it’s been dropped so much. For long term investor (say 2 years or longer), the market will eventually get better.
So then, should I buy more? Let’s say we have 67% chance the market has almost hit the bottom, 33% chance that the market will get worse. Buying now with one shot may still have a chance to lose further, if the market drops more.
I am doing dollar cost averaging during this period, and buying in several patches will lower the risk.
Matthew Amster-Burton says
From a purely logical standpoint, you’re right. But the correct advice, I think, is simply “stick with your plan.” Before you made your plan, you knew or should have known that the stock market can crash, gyrate, and do various other dance moves.
Sure, I believe in rebalancing. But when I wrote my IPS, I looked at the data and at my own behavioral tendencies and decided that once-a-year rebalancing would be fine. I’m taking your advice: I’m buying and not selling. But I do that every month, automatically, anyway.
I think Matthew is right on this one. “Don’t Sell/Don’t Buy” is not meant to be a prognostication on the market. It’s meant to state that you should take ANY action based solely on one wild day (or a few, for that matter). We often tell people not to try to time the market when friends and coworkers are poised sell after a big single-day drop. The same advice applies to those who would time a big buy based on the same event.
Stay the course. Stick with your plan. Continue to invest or withdraw a little each month, depending on what stage of life you are in. Big swings over a few days are not a queue to take drastic measures.
Post above meant to say that you should NOT take ANY action based solely on one wild day. TFB–You need an edit feature for comments.
TFB, do you not follow a rebalancing bands strategy? If using 5/25, how is it you reached a trigger point to rebalance? I made the mistake in 2008 of rebalancing every time I tax loss harvested (which was about 4 times IIRC). I’m not keen to repeat that mistake. If stocks fall enough to bring my stock/bond allocation off by 5%, I’ll buy more. Otherwise I’ll wait.
Harry Sit says
@Sammy_M – Not strictly. I will have a post about the 5% rebalancing bands on Monday. If you must wait for the 5% trigger, you will miss some not-quite-5% events as what we have as of now. Of course the upside is that if it does go down deep, as in 2008, waiting for the 5% trigger preserves your firing power.
I happen to have a lot of firing power prior to the recent events, from my unwinding overbalancing in April and from my cashout refinance in July. I don’t mind being early. I also don’t mind rasing my stock allocation above my target if necessary.
I’m going to go with Matthew on this one, too. I don’t see don’t buy/don’t sell as conflicting. If I were thinking of going to the grocery store but didn’t need anything as my cupboards are full, that’s don’t buy. If I were thinking of donating to the food bank but my cupboards were *just full enough of just what we needed and not more* that looks like don’t sell to me.
From a housewife perspective~Going to read about emerging markets now 😉 And that unwinding overbalancing~
Harry Sit says
@anie – When I went to the grocery store earlier this week, grapes were $1.49/lb (normally $2.99/lb), and yams were $1.99/lb (normally $1.29/lb). So I bought more grapes than I originally planned and I bought no yams. If I have yams at home and there’s an easy way for me to sell back to the store at $1.99/lb, I would do that too. I don’t mind having more grapes and no yams. If grapes become cheaper next week and yams more expensive, I will continue to buy grapes instead of yams.
This discussion needs to be couched in terms of risk management. You don’t know what the real value of any particular asset will be the future. At best you can assign probabilities and allocate appropriately.
If you have the risk-appropriate strategy in place, just ignore the news.
Harry Sit says
@Ace – I added the edit comments feature.
Share Trading Guru says
Even I suggest this is not the right time to buy. People can sell some of their stocks that are going to fall even further. For this, they need to monitor their portfolio and performance of stocks.
ABC Stock Investing says
We sold a good portion of our investments, as hard as it was after heavy losses. Our reason is mainly because of a feeling. A feeling that there is more downside risk ahead than upside potential. Worse case is a global economic meltdown. Best case is slow growth, high unemployment, and dismal housing gains. Reality will probably be closer to the best case, but how much resiliency is left in the global economy?
One aspect of 5% (or whatever) rebalancing bands that is often unappreciated is that frequent rebalancing on the way down amplifies your losses, and frequent rebalancing on the way up reduces your gains.
Sam S says
Great post, Harry. Thanks for the link to this post on today’s “This week’s articles I read”.