Why Didn’t I Sell?

August 08, 2011

“Why didn’t I sell before the market dropped?”  is a question I got from a caller to our helpline last week.  This is a common question, as you can imagine, after a big drop in the market or during an extended bear market.  This caller was extremely frustrated because he was stuck between a rock and a hard place.  He had already turned in his paperwork to retire within the month (too late to cancel) and was making a transfer from his 401(k) to a pension purchase to provide additional fixed income – essentially changing the goal of this money from long term growth to income.  The market drop would lower his monthly income for the rest of his life because his lump sum was being used to calculate his monthly income payment.  He was distraught.

His question was valid.  He should have already “sold.”  When his goal changed from long term growth to current income, he should have moved his investments inside his 401(k) to a money market.  He no longer needs long term growth: the goal for his money now, is very short term.  It is actually just about as short term as you can get – a month!  As a 25 year veteran in financial planning, I’ve seen this over and over again even with my own family members.  People tend to sell at the wrong time – just simply because the market is down, but when their goals change, they tend to just continue with the status quo.

Long term money belongs in the stock market and short term money belongs in a stable account, like a fixed account or a money market.  There is a reason they call a down market a “bear” and a growth market a “bull.”  Let’s start with the bull.  If you are hiking in a field and cross the farmer’s fence and run across a bull, you have a pretty good idea of what he will do.  When he decides to, he’ll charge you straight on with some serious force.  That is his bag of tricks.  You don’t know when he’ll charge, or how long he’ll run or how fast, but that is what a bull does – charges forward.  It is not a straight line, but you get the concept.  The Dow Jones Industrial average on Jan. 2, 1990, closed at 2810.15 and on January 14, 2000, closed at 11,722.98. (For chart click here.)

A bear, however, is extremely unpredictable in behavior.  If you think about it, there are reasons why Matadors don’t fight bears in a ring.  Bears can run fast, climb trees, and stand on two legs.  You don’t know what they are going to do next.  We saw this last week when the Dow dropped over 500 points, and 4.31% wiping out any gains for the year.  If you need the money right away, like our caller, there is a problem.  If you don’t, and have a long term time frame, a bear market doesn’t scare you.

When should you abandon your strategy?  When your goals change, you need a new strategy.  When the purpose for your investment changes, or your financial circumstances change, you need to review your strategy to see if it still fits for you.

Should you sell just because the market is down?  Absolutely not.

Should you review your accounts?  Absolutely.