There’s no question about it. This is a scary time to be an investor.
The global coronavirus pandemic has brought a near-unprecedented shock to the U.S. stock market, which just experienced its quickest descent ever into a bear market, defined as a drop of at least 20% from a recent high.
No one knows how long or severe the outbreak could be, but the situation in countries like China and Italy shows that daily life, and the economy along with it, could grind to a halt. If you’re thinking of selling your stocks, you’re not alone. Searches for “Should I sell stocks” have soared on Google over the last few weeks as the market’s plunged. It’s no surprise that in a global pandemic, some investors seeking the safety of cash and bonds.
If you’re considering selling stocks, you may want to first take a deep breath and consider some of the wisdom of Warren Buffett, the greatest investor of all time. Remember that over the long term, 10 or 20 years, the market will almost certainly bounce back, returning to greater heights, and owning stocks will pay off.
However, once you’ve reminded yourself of the compounding power of long-term investing, there are still valid reasons to sell stocks right now.
1. You need the money soon
Most money managers recommend only investing money in the stock market that you won’t need for a long time, like ten years. That gives the investment enough time to appreciate and reduces the risk of short-term crashes like the coronavirus outbreak. The same rule applies to selling stocks. If you’re going to need the money soon, in the next year, say, you may want to sell now and avoid the risk of an extended crash.
Personally, I had an offer to buy a house accepted on Feb. 19, the day the S&P 500 peaked (oof). I wasn’t planning to sell stocks until I needed the money for the down payment, but given the volatility in recent weeks, I decided to sell this week, since the risk of losing that money is greater than the reward of potential returns.
If you have a big purchase planned in the next year or need to shore up your emergency fund, this may be a good time to get that money ready in cash.
2. You’ve exhausted your risk tolerance
Every investor has a different risk tolerance. Your own relationship with risk is both a psychological and financial consideration that will vary based on your age, income security, time horizon and emotions. If you’re a retiree who’s already losing sleep over the market crash, it may be time to take a seat on the sidelines until the chaos cools off, or shift to safer assets. On the other hand, if you’re a young investor planning to sock away money for decades, the bear market plays to your advantage as stocks become cheaper. In other words, the sell-off is good for net buyers of stocks.
3. You’ve found a better place for your money
Not every stock is meant to be held forever, and selling because you see a better investment for your money is almost always a valid reason to make a trade. You may want to take some profits from a big winner and allocate them into a safer, more recession-proof stock like Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). CEO Warren Buffett, after all, has made has reputation by outperforming the market in times like these. Berkshire also has a diversified portfolio of stocks and subsidiary companies to withstand an economic shock, and about $125 billion in cash for Buffett to go “elephant hunting.”
Or you may want to go bargain-shopping yourself. One stock that looks appealing to me right now is Disney (NYSE:DIS), which is down more than a third since the coronavirus sell-off began due to its exposure to the travel sector. There’s no doubt that the entertainment giant’s profits will take a hit through at least the first half of the year as it’s been to forced to close its parks in Asia and will see an impact at its other parks and resorts, but Disney has an unmatched portfolio of enduring entertainment brands and a flywheel business model that generates healthy profit margins in a normal economy. There’s little doubt that the company will bounce back from the current crisis.
Finally, let’s review one bad reason to sell right now.
You think you can time the market (Spoiler alert: Probably not)
Market timing, which involves buying and selling based on anticipation of the market’s peaks and troughs almost never works. That’s because it’s impossible to know what the market is going to do on a day-to-day or week-to-week basis because those movements are largely news- driven. For example, it’s easy to imagine a number of catalysts that would cause the market to move higher or lower right now.
Investors would surely be encouraged if scientists made significant progress in coming with a treatment for coronavirus, or if the warmer springtime weather seems to beat back the disease, or if “social distancing” substantially slowed the spread and people began to gather with one another again. Similarly, school closures and other lockdown-style events will likely send markets plunging even more as could a round of worse-than-expected earnings reports and generally terrible economic data. What if a high official like President Trump contracted the virus?
Here, again, it’s worth heeding the advice of Buffett who’s called trying to time the market a waste of time, putting it succinctly , “I can’t time stocks… I don’t know anybody else who can either.” As Buffett counsels, the best way to invest is to buy great companies at good prices. That advice only becomes more true in a bear market. Invest accordingly.