This is a guest post by Neal Frankle of WealthPilgrim.com. Neal found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions.
Is This the Time To Buy or Sell Your Stocks?
Many people have considered changing their approach to investing. They’ve considered abandoning their long-term approach to something a little more active.
Some people believe this is a great time to buy stocks because they think prices are so low. Other people think that if you still own stocks, this is the time to sell because they think values are so low – and going lower.
How do investors make those decisions?
Some decide based on their assessment of the company, the economy, the political environment, interest rates and the market. They are often called “fundamentalists” but I refer to these people as “skills based” investors. It takes a very special skill to deliver outstanding results on a consistent basis– and few people actually succeed. You might be a smart cookie who made the right call recently but I wouldn’t get cocky. Even a broken clock is right twice a day.
Others make their decisions based on predetermined rules – these people are referred to as “technicians”. They look at moving day averages, charts, graphs etc. I call these people “rules-based” investors.
The benefit of a “rules-based” approach is that it keeps emotions out of the equation. When one line crosses another line, BOOM! They take action. They don’t think about it and they don’t second guess themselves.
It’s easier to make investment decisions using a rules-based strategy i.e. to use technical analysis. Notice, I didn’t say that the decisions are always better…..just easier.
The downside to this approach is that it’s rigid and may ignore current events at great expense. This could mean the difference between a sunny retirement in Florida or a cold winter in Philadelphia punching receipts at Costco on your 84th birthday. Yikes!
So which approach is better right now? Neither.
You have to be a very talented person to approach the market using a fundamentalist method. And you might have to be crazy to approach the market as a technician.
The big problem with this method right now is volatility. It’s off the charts.
As volatility increases, “rules” get triggered faster. That can cause you to get in and out of the market very quickly and at exactly the wrong time. If you try to remedy this by relaxing your rules, you may move too slowly.
Check out the chart below. It tracks an index that is a proxy for market volatility and as you can see, it’s gone through the roof. (Interestingly, market volatility started its recent and prolonged ascent in July 2007 which corresponds exactly with the suspension of the up-tick rule. Perhaps that’s the subject of another post.)
What to do?
If your “rules based” approach is too broad, you run the risk of staying out of the market too long. If your “rules based” approach is to narrow, you’ll get jerked in and out of the market. No good.
The fundamentalist approach is also flawed. If you don’t have such skills now, this isn’t the time to try to learn. It would be like trying to learn how to fly once the plane has already taken off the runway. But don’t feel badly, many professionals do a poor job of this as well.
So, if we’ve discounted these two approaches….what’s left? The mattress?
No. Believe it or not, the smartest thing for you to do right now might be to do nothing. Do not get fancy.
You might be looking for a way to re-coup the losses you’ve incurred over the last year but that could be a mistake. You might be tempted to have someone manage your money that uses one of the two approaches mentioned above. By definition, most people who avoided big losses last year used a very unconventional approach to investing. That means that such an approach could expose you to huge risks going forward.
I know that it’s been a painful 12 months for stock investors. I know you want a “Bayer aspirin for your bucks”. But this is not the time to make drastic changes.
If you took a long-term approach to investing before, don’t abandon that approach now. You probably had a balanced approach for good reason and it likely served you and your family well for many years. A long-term approach reduces risk and allows for growth. Yes, it has bad….even terrible years….but over your lifetime, such an approach should continue to serve you.
I’ve explained the limitations of fundamental & technical investing in an effort to help you stay on track. I hope I’m not too late. Have you been tempted to change your investment approach as a result of the current situation? If so how?
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- Christian stock investing: How to be Biblically responsible
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- Basics of stock market investing: 3 traps to avoid
- A little about ETFs: 4 reasons you may want one
{ 3 comments… read them below or add one }
The problem we all seem to be making, especially with the current world economy issue, is we are selling stocks when we should be buying!
Fantastic Blog Post, hopefully this will help entice some people to keep faith in stocks.
I’m waiting for another dip before buying again. We’ve just had a nice seven-week rally, so ideally this is not the time to buy. I’d either contribute more to other parts of your portfolio (like the emergency fund) or pay off debt for now. Or save the cash up when the market goes on a nice dip again.
Peter, thanks for the kind words. I believe that the only way to approach this market is to do so with 10 year money. Short-term thinking with long-term money can lead to expensive mistakes.
Money Energy. This may seem like a contradiction to my earlier comment but I do agree that in short-term, the market could correct. I also think the best use of cash right now is indeed to pay off debts or build cash reserves but that is what I’d do regardless of the market.
Thanks!