When the Road is Uncertain, Stay the Course

Brian Cochran

When the market is volatile, the temptation to sell stocks is strong, but it rarely benefits investors. According to Bank of America/Merrill Lynch, investors pulled $39 billion out of stock funds and over $8 billion from bond funds in the week ending Dec. 12, 2018. These extreme fund flows tell us that investors are selling into this down market at record levels. I fully understand the emotions that cause investors to abandon a good investment strategy, but it is my experience that most sellers do not understand the factors associated with timing the market.

First, you should only sell if you know things are going to get worse. Any bad news that you have heard or read is already priced into the market. Most new information (good or bad) is reflected in stock and bond prices within seconds. Future losses will be the result of future information, and the future is always uncertain.

Second, you have to assume that you will be willing to buy stocks again when things get worse. The only way you benefit from selling is if you return to stocks at lower prices. If you are too scared to own stocks now, do you think you will re- enter the market when the news is even worse? I have yet to meet an investor who sells out of fear only to suddenly gather the courage to buy as the news becomes more negative. Market timing always requires two decisions. Getting out is the easy one. Getting back in is a much harder choice.

Lastly, the net benefit of selling and then buying must be positive. Costs of moving in and out of stocks could include trade fees, spreads in stocks and bonds, and capital gains taxes. These costs create extra headwinds for investors, and they can add up quickly when trading in and out of markets.

Investors should consider these three factors before trying to time the market. Most who sell during a downturn will wait until the “dust clears” before returning to stocks, but this pattern of selling low and buying high is not a formula for successful investing. That’s why a good advisor coaches clients to stay the course.

Any opinions are that of Brian Cochran and not necessarily that of Raymond James.