Is It Time To Get Out Of The Stock Market?

October 25, 2018

We’ve all heard the advice to “buy and hold” when it comes to investing, but when is it time to “sell and let go?” Surely we aren’t expected to just keep on investing forever and never spend any of that money, right?

What about when the market begins to behave erratically like it has recently – down one day; up the next. Down. Down some more. Up a bit. Up, no wait, it’s down again. It’s enough to make some people motion sick and when that happens, they just want to get off the ride. Just as we wouldn’t hop out of a moving roller coaster the first time our stomach does a few flips, nor should we jump out of the stock market when the returns get bumpy. Let’s all keep our arms and legs inside the car and wait for it to arrive safely back at the platform before we move. But when is that, exactly? Are we there, yet?

Why do we react this way?

Whenever the stock market takes a dip or a swerve or a dive, and the news headlines begin screaming about how the market is “plummeting,” “crashing,” or some equally anxiety-inducing description, our inner lizard brain (a section called the amygdala) begins to twitch and send us into fight or flight mode. Since we can’t exactly fight the stock market, many of us turn to flight and run away by selling our stocks and embracing good old, dependable cash.

Which, logic dictates, is exactly the wrong thing to do. Remember the advice to “buy low and sell high?” Your amygdala just told you to run away from the perceived pain and sell low. Bad amygdala. Bad.

Our fight-or-flight response is quite natural, and it serves us well whenever we need to escape a burning building or react to an unexpected letter from the IRS. It is not so helpful when making investment decisions. Still, there must be a time when it is okay to get off the stock market roller coaster, right? Yes, yes there is.  Several in fact.

Who should sell

Eventually, for most of us anyway, we will need or want to sell those investment dollars because we need the cash so we can buy something important or support ourselves in our golden years. It might also be time to re-balance the mix of stocks, bonds, cash and whatever else you’ve selected for your portfolio because one or more of these categories has grown too heavy relative to the others. Also a good reason to sell (and reinvest).

All of the following are good reasons to take some money out of stocks, regardless of what the market is doing on any given day:

  • You are taking too much risk when considering your limited investment time frame and/or your physical and mental well-being. It is a good idea to periodically measure your risk tolerance and adjust your investments accordingly.
  • You will need this money soon, such as within the next 3-5 years. This might be a down payment on your future house or vacation home, college tuition bills, etc. Whatever the purpose, make sure it is a goal that you already had in place and have been investing toward for several years already. Start moving these funds into cash (CDs or money market accounts) so the dollars will be there when you need them.
  • You are trying to make up for lost time. Sometimes we get a late start with saving and investing for our goals. The temptation is to “bet it all” and invest aggressively in stocks in the hopes of hitting an economic home run and earning 25% on our investments like we recently enjoyed during the 2017 stock market. This may be tempting in theory, but in practice it can be a lousy idea. Remember the 2008 stock market? Down 33.8%. Plummeted. Crashed. Burned. Could you live with that kind of a drop in the short run? Me, neither. Better to re-balance to a more reasonable mix of stocks, bonds, and cash and start aggressively saving instead. Shovel as much money as you can into your retirement plan at work, your IRA, and your spouse’s IRA. As one of my CPA friends is fond of saying when asked how much to save for retirement, “Save until it starts to hurt, then save a little more.”

How to feel healthier (and wealthier) when the market does crash. And it will.

Instead of using market crisis headlines as a reason to fret about our investment performance and beat ourselves up over allegedly bad decisions, we could decide to use this energy as an opportunity to review why we made those investments in the first place (comfortable or early retirement, putting kids through college, etc.). Have any of those reasons for investing changed? Are these dollars we are going to need in the next five years or is their intended use still many years in the future?

If nothing substantial about your life or financial situation has changed, the best course of action is nothing. As in do nothing. Don’t move. Don’t change. Keep your investments right where they are and tell your twitchy amygdala to calm the <bleep> down.

Actually, there are some things we should do when doubt begins to creep into our minds regarding our investments:

  • Breathe.
  • Relax.
  • Remind ourselves that this is what buying low (and selling high later) feels like.
  • Turn off the news for a while. Maybe a long while.
  • Increase your retirement plan contribution at work by another 1%. (This is what buying low feels like.)

We can’t control what the market does, but we can control what we choose to do. And the worst thing you can do when it starts to go down is get out, unless you shouldn’t have been in there in the first place.