Should you sell your stocks right now?
It's a question on a lot of people's minds, as evidenced by recent Google search trends.
A spike in volatility last week sent the stock market down 5%, which likely got people thinking if now is the time to ring the register.
It's a valid thought, especially when you consider the S&P 500 experienced a historic 63% rally to all-time-highs amid the sharpest economic decline since the Great Depression.
The answer to this simple, and reasonable question is: it depends.
Mainly, it depends on your time horizon. How long do you anticipate it will be until you need to tap your investment portfolio for a sizable purchase like a down payment on a house? How long until your retirement, when you will rely on your stocks and bonds to replace a sizable portion of your annual income?
If the answer to that question is years, not months, then no, you should not sell your stocks. Instead, you should stick to your long term plan and remember why you're invested in the first place.
Don't have a long term plan? Then call Ithaca Wealth Management to build yours today. 607-882-1434
If you do sell, not because you need the funds but because market volatility shook you out, then when will you buy back in?
When it's time for you to buy back in near the next market bottom, you won't want to because the headlines will be incredibly negative.
The emotion driving your impulse to sell near the market top will be the same emotion that prevents you from buying back in near the market bottom: fear.
Instead of fearing market volatility and uncertainty, embrace it and take advantage of it, because trying to time the ups and downs of the stock market is a surefire way to miss out on the immense power of compound interest.
"The first rule of compounding: never interrupt it unnecessarily."
- Charlie Munger (Vice Chairman of Berkshire Hathaway).
On average, the stock market experiences a ~14% sell-off every single year, but usually ends the year positive.
Realizing that volatility is the cost of admission to building wealth in the stock market will help you psychologically embrace sell-offs.
You can take advantage of the inevitable market dip by dollar cost averaging into the market. Making a bi-weekly/monthly contribution of a set amount of money will have you rooting for a market sell-off so you can buy in at more attractive valuations.
You can also consider an allocation to bonds. If the recent market volatility has you focusing less on your long term plan and more on the short term movements of your account value, consider increasing your exposure to bonds. Bonds will help soften a decline in your portfolio amid a market sell-off, and can be used as a source of funds to buy stocks during periods of market stress.
One of the biggest cliches in the investment industry is: It's about time in the market, not timing the market. This chart explains why it's a popular saying.
Chart of the Week
The chart above, dating back to 1871, is a good reminder that stocks go up over time.
Why? What's driving the consistent move higher in stocks? And why should you stay invested today with stocks near record all time highs?
The answer is supply and demand. In the long run, there have been more net buyers of stock than there have been net sellers. Meanwhile, the supply of available stocks to invest in continues to dwindle thanks to corporate stock buybacks and a steady drop in publicly traded companies.
In short: Rising demand + falling supply = higher prices.
The number one motivation behind buyers of stock is their desire to claim a stake in the virtuous cycle of rising corporate earnings, driven by an ever strengthening consumer, who will continue to spend more money and thus help boost corporate earnings.
And then there's low interest rates, a relatively new phenomenon.
Low interest rates mean bond investors are not getting paid what they used to get paid when lending to companies/governments. In other words, investment opportunities are dwindling.
On Wall Street, this is commonly referred to as T.I.N.A.: There Is No Alternative.
The US 10-year treasury note yielded 6% in 2000 at the height of the dot-com bubble. Today, it yields just 0.70%.
In 2000, investors had a choice between tech stocks that generated little to no revenue and zero earnings, or a guaranteed return of 6% backed by the full faith and credit of the US government.
Today, an investor can choose between technology stocks that are growing revenue quickly, generating immense profits, and are hoarding cash at an unprecedented rate, or a guaranteed return of 0.70% backed by the full faith and credit of the US government. Which would you prefer?
Additionally, low interest rates enable companies to borrow money at a near-zero cost, of which the proceeds are then used to either fuel reinvestment in the business which should help boost corporate earnings, or to buy back stock.
In the end, today's era of low interest rates helps boost investor demand for stocks, all the while reducing the supply of stock to invest in via corporate buybacks. And when you consider the Federal Reserve's new policy mandate of targeting an average 2% inflation rate, interest rates are likely to remain near-zero for years to come.
These factors, combined with favorable US demographics and a never ending cycle of technological innovation, means for the long term, you should continue to bet on stocks.
At Ithaca Wealth Management, we build customized investment portfolios to help you compound your wealth. Reach out today to learn more, or visit www.ithacawealth.com
Your Investments in the News
- Abbott received emergency FDA approval for its new rapid COVID-19 test. The test delivers results within 15 minutes with 98% accuracy. The test is expected to cost just $5. The US Government will initially purchase 150 million tests to be distributed to states.
- Walmart introduced Walmart+, a new $98/year service meant to compete with Amazon Prime. The service will grant users access to exclusive deals, free same-day shipping for thousands of items, and access to a scan and go app that allows shoppers to bypass the checkout lane when shopping in the store and pay for their basket via the app.
- Home Depot, Walmart, Nvidia, Salesforce and Medtronic surged after reporting Q2 revenue and profits that beat analyst expectations.
- Salesforce and Honeywell were added to the Dow Jones Industrial Average index, replacing Exxon Mobil and Raytheon, respectively.
- Verizon increased its quarterly dividend 2% to $0.6275.
- Costco reported total sales growth of +13.2% in August, signaling that the retailer is retaining customers it attracted amid the COVID-19 pandemic. E-commerce sales at Costco jumped +102% in the month as well.
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Market Musings & Tidbits
Gas Demand Rebound Signals Continued Economic Recovery
Demand for gasoline is one of the most followed indicators for a read on strength of overall economy.
The Housing Sector To Everyone Else: What Recession?
New home sales soared at their fastest growth rate in decades as city dwellers flock to the suburbs amid the COVID-19 pandemic.
The Next Two Months Could Be Rough For Stocks
On average, stocks sell-off in the months of September and October during an election year, as uncertainty builds around which administration will win the presidency.
Stocks Are Suggesting A Biden Presidency
Since the start of Summer, a basket of "Biden" stocks has been significantly outperforming a basket of "Trump" stocks, leading some to speculate that the market is pointing to a Biden win in November. Biden stocks include solar and tech while Trump stocks include oil and basic materials.
Perspective On Historical Bull Markets...
The March 2009 - February 2020 bull market was the longest on record.
And Where We Stand Today In A New Bull Market
The current bull market rally off of the March 23 low is proving to be the strongest on record since its inception nearly 6 months ago.
Finally, Investor Disbelief In Market Rally Continues
Throughout 2020, investors have been selling their stocks, evidenced by consistent fund outflows. Disbelief in the current market rally has more than set in with the average investor. This tends to be a contrarian bullish indicator, signalling that sentiment is weak and there is more upside in stocks ahead.
Thanks for reading, and please reach out with any feedback or questions.
All the best and Happy Labor Day!
