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It's only human nature to want to sell your investments in a down market. Most of us are risk-averse and want to avoid losing more of our money. But when it comes to investing, a logical approach and a long-term mindset are required to outsmart the short-term down markets. Before you decide to sell your investments, consider the following:
1. Every recession or downturn has been followed by a rebound
There have been approximately 33 major recessions in the United States from 1854 up until 2018. Of all these recessions, 100% of them have seen a rebound to surpass former market highs. What does this mean? Recessions are a natural part of the economic cycle. There's even an argument that they are healthy when looking at the big picture for the economy.
So if each market downturn had a 100% probability of coming back, why guarantee a loss (or lower return) by panic-selling when statistics lean in our favor?
2. It's contrary to the common sense of buy low, sell high
Timing the market is a bad strategy, but noticing when stocks are "on sale" can be a great buying opportunity to grow your returns. If you panic-sell your investments because the market hits a bump in the road, you're essentially following a strategy of buying high and selling low -- the opposite of common-sense investing.
In a down market, hold to your previous research on your investments that persuaded you to buy in the first place and wait out the storm. In fact, if your passion for your investments is still burning, consider doubling down and buying more shares while they are on sale.
Warren Buffett, perhaps the greatest investor of all time, has said, "Be fearful when others are greedy, and greedy when others are fearful."
3. You miss the opportunity for bigger gains
The best time to buy a stock is when it's undervalued, and down markets often provide greater chances to buy stocks that are undervalued. After doing your due diligence, you may be able to capture even greater returns by purchasing shares in a down market while holding on to your current investments for the long term.
Even major companies like Apple, Amazon.com, Microsoft, and Facebook may drop in price during a down market, but chances are they will continue growing due to their strong brands, widespread following, and healthy balance sheets after the storm passes.
4. Occasional down markets are actually a healthy economic event
The stock market is indeed in some ways a living and growing entity. Consider this comparison:
An athlete builds strength and endurance by regular exercise and intense workouts. But it's common knowledge that with intense workouts, the body needs to rest and recover, in order to then return and repeat for continued growth. Runners who train over a distance followed by regular rest, then increase that distance each time, can achieve continual growth over time.
Economies function in a similar fashion. In order for continued and intrinsic growth to occur, regular "rests" (or downturns) are necessary to eliminate market bubbles and adjust to intrinsic market prices.
How does this help you during a down market? Knowing how the market cycles over time can give you peace of mind that a downturn is to be expected and can often be a healthy event that poses great buying opportunities.
5. Selling in a panic locks in your losses
In most cases where investors feel panic, they are often already in the red with their investments and worry that they will lose even more. With that in mind, if you sell your investments during a down market, you are locking in your losses. Reminding yourself of why you invested in each company in the first place will help keep you focused on the long term and avoid taking a guaranteed loss.
Emmet Savage, co-founder of MyWallSt, has beaten the market by three times over a decade, and credits much of that to holding on to his investments for the long term, even during recessionary markets. When you do proper research before deciding to invest, you have reason to do the same, and in a lot of cases, those companies end up providing double and triple growth.
When should you sell?
The short answer is that it's more of a personal decision than a universal strategy. Having said that, referring to your investment research and comparing it to the company's current state will give you a good idea of how to respond.
Has something changed that causes you to think the company is no longer a great investment? This may be a red flag to consider selling your investment and choosing a company that better aligns with your strategy.
Which brings up two more quotes from Warren Buffett: "Our favorite holding period is forever."
And "If you don't plan on investing in a company for 10 years, you shouldn't own it for 10 minutes."
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in some companies mentioned above. Read the full disclosure policy here.