Now that investor fear is at an historic high and the market has hit a 12 year low, is it time to dump our stocks and move to cash and gold?
No. It’s not.
The time to sell an asset is NOT when no one wants to own it. The time to sell is when everyone wants to.
Whenever the overwhelming prevailing sentiment says “you can’t lose money” in real estate, the stock market, gold, or baseball cards it might be a good time to sell. But when people are terrified to own those things, it might be a great time to buy. As Warren Buffet wrote, “be greedy when others are fearful, and fearful when others are greedy”.
Investor sentiment regarding real estate and stocks is at the worst I’ve ever seen it. Maybe it will get worse before it gets better, but I don’t see it getting much worse. Markets don’t boom or crash forever. I believe the market is waiting for a glimmer of hope and we’ll see demand for stocks (and their valuations) surge. For that to happen investor sentiment must improve. When President Obama gives “fireside chats” rather than “firesale chats” we’ll see that happen. I’m very confident in his ability to inspire confidence in the market when it becomes his priority.
We have been buying stocks during the market drops of the last two weeks. We were buying in September, October and November of 2008 as well. I don’t know if this is the bottom or not, but I’m confident that the purchases we’re making today will yield great returns over the long-term.
Over the past year we have been in the midst of a category five financial hurricane and everyone has gotten wet. This market environment has been enormously stressful for retirees. For pre-retirees investing in their 401ks each month this market is a once in a lifetime long-term opportunity.
So when is the right time to sell?
The right time to sell a stock or a bond or real estate from an asset allocation standpoint is determined by an individual’s need for cashflow and diversification in relation to his or her long-term goals. In a wealth management framework, this is accomplished through periodic rebalancing. When a certain asset class exceeds its target percentage (usually because it has appreciated), we sell it and move the proceeds into an under-represented asset class (it could be under-represented because it underperformed). This discipline removes emotion from the buying and selling decisions of managing a portfolio. And over the last year, for many investors it has been easier said than done.