Buy low, sell high. That’s how you make money in the stock market, right? Like most things in life, this simple wisdom gets much more complicated once your boots hit the ground.
For example, maybe you “thought” you bought low but now your investments are even lower and the market seems to be crashing. What do you do now? If you look to the financial news for guidance, you are likely to be barraged with inflammatory headlines that make you even more uneasy.
In fact, after a small dose of financial journalism, it might seem like the best thing to do is sell your investments and go to cash before you lose even more of your hard-earned money.
What’s an investor to do?
Well, the first thing you should do is reevaluate your investments. Do they still seem like good investments? Are your reasons for buying still sound? Would you make these same investments again if the market wasn’t crashing?
If the answer to these questions is yes, history shows us that staying with your investments, rather than selling them when the market gets rocky, is likely to deliver the best results over time. But don’t just take my word for it. Here are 3 reasons why selling your investments when the market is down is a bad idea.
1. Most people don’t understand or appreciate how powerful and beneficial the stock market can be.
Most of us have heard that the market is cyclical. This means that every bad market is followed by a good market, which is followed by another bad market and another good market and on and on and on.
However, what most people don’t realize is that the good markets last far longer than the bad and they go up far more than the bad markets go down.
Take a look at this image. It shows all the market cycles from 1926 through the end of 2017. Are you surprised at how much more often the market is up than down? [here is another article I wrote that discusses this image.]
As you look over this image, you will also notice that the average bad, or “bear” market lasts less than 1.4 years and goes down a little over 40%. I know it might seem impossible to recover from a 40% decline but look at how much better the good markets perform.
The average good market rises for more than 9 years and goes up 480%.
This means that in the average stock market cycle, there are 6 good years for every one bad year and the market goes up 11 percent for every one percent it drops.
Honestly, don’t these seem like pretty good odds? When you look at it this way, doesn’t it almost seem like the market is rigged in your favor? Keep this in mind the next time someone compares investing in the stock market to going to Las Vegas!
2. It is impossible to consistently get in and out of the market at the right time.
Many people are under the impression that the secret to investment success comes from getting in when things are good and getting out before they go bad. And if you can’t get out before the trouble starts, they think it’s better to get out sooner rather than later.
But in reality, getting in and out at the right times is far more difficult than most people realize.
One reason it is so hard to get in and out of the market at the right time is because the market is notoriously unpredictable. Nearly every time you turn on the news or open a newspaper, you could find a reason to believe that the market is headed for a significant decline.
Take a look at this image. It shows many of the major headlines we saw over the last 10 years and any one of them could have been seen as a reason to sell your investments and wait for a better time to invest. And yet had you taken this action, your investment performance would have suffered.
If you look at this chart, you will see that despite all those unsettling headlines over the last decade, $10,000 would have more than doubled if we had simply stayed in the market. And this brings us to problem number 3.
3. Missing just a few of the best days will significantly impair your returns.
Another problem with selling your investments when things look bad is that the market’s biggest gains often come right on the heals of its’ biggest declines.
We saw this in 2003 when the US invaded Iraq and we saw it again in March of 2009 when the current bull market began. This bull market began with a bang on the day after one of the worst market declines I ever saw in my 25-year career. And once it started moving, it made huge gains in a very short period of time. If you weren’t in when it started, you would have missed significant gains.
So, if you are inclined to get out of the market when you think it’s headed lower, you need to know that it is extremely unlikely you will be back in to benefit from the gains once things turn around. And do you know how this will affect your investment performance? Take a look at the bar graph at the bottom of this image.
If you missed only the 10 best days for 2003-2017, you would have received only half the return of someone who had stayed invested for the entire period. Only half the return!
And if you missed only the 20 best days over that same period, and keep in mind, that is only 20 days out of 5,000, you would only have received a third of the return.
What’s the point of investing if you aren’t getting the good returns that the market provides? Why deal with all the worry and aggravation? You’d be better off parking your money in a CD or some other low yielding but “safe” investment and avoiding all the anxiety and heart ache that comes from investing in the market.
Why not give yourself a break? Pick some good investments, make sure they are in line with your goals, and then get out of the way and let the market do the rest.
Investing is really pretty simple. It’s us investors who make it complicated.