Thursday, September 03, 2015

The Pundits Are Wrong, Maybe You Should Panic and Sell

Nearly everything I read from personal finance professionals and columnists after the most recent dramatic stock market events is “not to panic.” The worst thing you can do after stocks take a big hit is to panic and sell, unless of course it's the absolute right thing to do. Perhaps you should be selling some of your portfolio right now, what follows is my reasoning.

Today, right now, this very moment might be the best opportunity you have to sell assets that you shouldn’t have owned in the first place.

This current bull market, while long in the tooth could continue for several more years and if you sell now you will lose out on those potential gains, but so what?

The vast majority of people mis-diagnose their own risk tolerance and take on to high a level of risky assets in their portfolio. Most people do the exact opposite of what they are supposed to do when investing, they buy high and they sell low. But stocks are NOT low right now, they are high when compared with historical valuations. They could go higher, perhaps much higher, but that doesn’t change the fact that they are currently overvalued. When stocks are overvalued they are likely to have lower future returns and more likely to experience "air-pockets", times of significant downward volatility.

The last week (and month) might have jolted you and reminded you that stocks don’t always go up. Recent market events may have reminded you that you aren’t comfortable with your portfolio dropping by 50%. Perhaps you are taking on too much risk right now because you were lulled by the long bull and very low volatility. The seemingly never ending upward movement of the stock market has turned people who were scared to death of stocks in late 2008 and early 2009 into fanboys who have lost that healthy fear.

I’m telling you now that it’s ok to sell, I give you permission.

If waking up to the market being down 1,000 points leads you to experience anxiety and makes you extremely uncomfortable you probably have too much money in stocks.

I’m not saying to go 100% to cash. What I am saying is that NOW is a good time re-evaluate your need for risk, your ability to handle risk and whether or not you are taking on too much risk. If in that evaluation you determine you are too heavily invested in risky assets - sell. Stocks are down, but in the scheme of things, not by much. We are still higher than we were about a year ago and we are WAY OFF THE BOTTOM. If stocks were selling at what they were in early March of 2009 I’d tell you DO NOT SELL. But stocks are not trading at generational lows, they are trading at what historically is a very high mark and selling now won’t hurt you.

Think of this recent market drop as an opportunity and a warning sign, you may not get another. You need to re-evaluate your risk tolerance and determine if you are taking on too much risk, if so, sell what you need to sell to reset to what feels more comfortable and fits within your long term financial plan (you all have one of those, right?). Don’t trust the media who have an absurd obsession with stocks.

Stocks are not a holy grail. There is nothing special about them. They are an asset. An asset that can be under or overvalued and SHOULD certainly be in most portfolios, but in moderation and with proper understanding. Don’t let the punditry first SCARE you and then tell you not to reduce equity exposure. Now may be a good time to reduce your exposure.

What if I sell and stocks go up you ask? So what if they do? Who cares? What matters is if you are on track to meet your goals and if your portfolio is positioned to get you where you need to go and is within a range that you can be comfortable with.

This recent selloff just might be the wake up call you needed to get out before the real drop (if it ever comes and I'm not saying it will).

Imagine it’s early 2008 and stocks are beginning to drop. You realize that you are over invested in risky assets and that you made a mistake being so aggressive. But you listen to the media pundits and decide to stay put because the market is off 10% from its highs. Instead of selling at what were still reasonable prices and reducing the exposure in your portfolio (notice I didn’t say go to cash) you hold on….and experience the entire 50% loss…and then you actually make the mistake of selling. Many, many people did this. Timing the market is not a great idea, but designing a portfolio that fits within your plan and risk tolerance is a good idea and if you currently are invested in a manner that is too risky for your plan and tolerance, now is a fine time to sell.

So there you have it, you have permission to re-asses, re-allocate and reset so that IF the next crash comes you don’t have a real panic attack and sell at what are actual lows. Sell some now and relax.

Scott Dauenhauer, CFP, MPAS, AIF