Thursday, January 30, 2014

The Stock Market is down, Should I Sell?

This question comes up a lot these days from my wife's friends: "..the stock market is down, should we sell?"

My answer is always "NO" based on the principles outlined in the Investing Philosophy Part 1 blog post.
  1. You cannot time the market.
  2. Transactions have costs which hurt your returns.
  3. Buy and hold a diversified portfolio of low cost index mutual funds
Maybe an easier way to look at the situation is to draw an analogy to buying steaks.  If you heard that the Supermarket was selling Tenderloin steaks for $15 a pound, down from $20 last month, you would say it is a good time to buy steaks.  Well, the companies listed on the stock exchange have not changed much in the last month and you can now buy them for 10% less than what they cost last month, so isn't it a good time to buy?

Just to prove that I am not a hypocrite, or not as big a hypocrite as you might think, I decided to check on my track record of buying and holding during a market downturn.  I pulled the transactions from the worst downturn in the past 20 years, February to March 2009.  I was a net buyer of stock mutual funds during this period, and I also bought less risky money market and bond funds as well.  The table below shows some of my stock purchases during this time.
Investment Transactions from Feb 1 2009 to March 30 2009
The returns over the last 5 years shown in the last column are very good as we all now know that the market has gone up since early 2009.  However, I vividly remember the talk at the time around the watercooler was all about selling stocks, buying gold, holding cash, etc.  There was even a little discussion of the appropriate firearms to buy, but that might have been at the bar, not the watercooler.

Anyway, the answer is no, don't worry about the market, keep a diversified portfolio and sell when you need to either re-balance or need the money for something useful.

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