I'm going to do something completely out of my character today. No, I'm not selling all of my stocks (in fact, I will be buying stocks today and selling none) -- I'm going to make a prediction! I'll get to that prediction after we walk through a brief logical exercise to keep our sanity in tact...
Here are some reasons NOT to sell stocks now...
You do not "lose money" until you SELL: The value of your investment assets has declined. This does not mean that you lost money -- it means the value of your account has declined! There's a difference...
Losses or gains are not realized until the asset that was purchased is sold.
Everyone else is selling: If you do not have at least 10 years' experience as an investor or money manager, then think about anything you've ever read or heard about stocks and the nature of financial markets: Have you ever heard "buy low and sell high?" Have you ever heard "be greedy when others are fearful?"
It's interesting how many investors do not get equally nervous when prices are hitting all-time highs. Imagine this scenario: "Oh my gosh, honey! Did you see my 401(k) statement? It's worth twice as much as it was five years ago! Call our advisor and tell her to sell immediately! I want to lock in my gains!"
You will increase the odds of poor performance: Selling (or buying) based solely on market conditions, and not your own investment objectives, can cut your returns in half or worse. Timing the market loses to time in the market more than 80% of the time.
"...the greatest danger is not to take the risk." ~ Soren Kierkegaard
Real risk has an inverse relationship with perceived risk: For every panic-selling day we have in the market, the closer we come to an equally powerful rise in stock prices. When risk is perceived to be highest, history will reflect that "real risk" is lowest. Was it "safer" to fly on a commercial jet one week before 9/11 or one week after 9/11?
Similarly, real risk is highest when perceived risk is lowest. When the Dow hit an all-time high above 14,000 this time last year, how many people were saying to sell stocks?
You are a long-term investor: Any money you do not need for three to five years should absolutely stay in stocks! Of course, it is possible you are improperly allocated or poorly diversified, but that would be another story. Ask yourself if you think stocks will be higher in three years or lower in three years. What do you think? If you're still nervous, what about five years from now?
Here's my prediction (actually, I like to think of it as a logical and rational deduction based upon history): Stocks, as measured by the S&P 500, will be higher at the close of trading on October 5, 2009 than the close of trading today, October 6, 2008. In fact, I will take this prediction one small step farther: Stocks will also outperform the average money market fund during that same time frame.
What do you think? Do you think stocks will be higher one year from now? If not, what makes you believe that? What are you listening to today? Emotion or reason? Cramer or logic? Is this capitulation?
Of course, no one will absolutely know the answers to these questions until this bear market is history. Let me know what you think...