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.
Get The Best Rate
Mortgage rates came back down! I saw rates below 4% for 30-year fixed, just over 3% for 15-year fixed, with no points and low closing cost. Let banks compete for your loan. Get up to 5 offers at LendingTree.com.