The Get Smart in 60 seconds series is designed to be like an espresso shot, a concentrated article dedicated to the Smart Investor on the go, with ideas or concepts delivered in 250 words or less.
You may be feeling a little silly now, holding stocks while the market drops.
Then, a fellow investor asks an intriguing question …
Since the market is dropping, why don’t you sell now and buy back later?
Why hold stocks now?
After all, the coronavirus outbreak remains unresolved.
Why not sell, wait till stock prices stabilize … then buy back later?
The idea is well-meaning. Reasonable.
But also flawed.
A history lesson
Stock markets tend to fall before the bad news is formalised. In turn, markets tend to rise before the good news arrives.
The Great Recession is a good illustration.
A recession is defined as two-quarters of negative GDP growth.
With the benefit of hindsight, we now know that the US entered into a recession in the fourth quarter of 2007, and emerged from the downturn in the third quarter of 2009.
The S&P 500, though, started flatlining in July 2007 before falling steeply in late 2008.
Here’s the kicker.
The index bottomed out in early March 2009, and started an 11-year bull run, long before any positive news came out.
In sum, when you choose to sell and buy back later, you would have to get both decisions right.
First with the timing of the sell, followed by the timing of the buy.
Even Buffett got his call to buy in October 2008 wrong.
It wasn’t the bottom.
But the S&P 500 has risen 160% in the decade since then.
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