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Podcast #1 - Panic Selling During the Coronavirus

Updated: Mar 3, 2022

-The investment strategy if you are more than five years from retirement

-The investment strategy if you are two years or less from retirement

-The investment strategy if you need cash to live on a monthly basis

Let's discuss the ramifications of panic selling your financial investments if you are not going need the money for the next two years and the coronavirus as it relates to finance. We know it's a very tough time for many people out there, so we thought we’d cover this as it's apropos and what I'm referring to is the stock market and to avoid panic selling during this point in time.

The one thing at the forefront is that allocation is everything so what I mean by that, is if you need any portion of your money that's tied to the stock market in five years or less then you want to avoid being in the stock market. So why I say five years or less is because back in the financial crisis of 2008 it took the broad market four-and-a-half years to recover.

If you need that money within the next year then you don't have that recovery time. This refers to the investor that are in pre-tax retirement plans meaning you're in a 401(k) or 403(b), 457(b) or even a traditional IRA; and then there's the investor that's a taxable investor . . . you have money that you have access to live off of so that's what we're talking about. If you need those funds and you're living off of the rally days, you should probably reduce your exposure to the market for the long term.

If you have time on your side meaning you're investing in a 401(k) and you're less than five years to retirement, you may need to re-evaluate where the allocation in your portfolio is. If you have more than five years on your side and then you really shouldn’t sell at this time.

What you want to avoid is capitulation where one makes a hasty decision as he or she is panicking. The people that didn't recover back in 2008 sold too soon because they didn't care what the consequence was.

Perhaps they were in concentrated stock positions or perhaps they had a 401(k) that was a company owned or had a large concentration or they had investments outside of their 401(k) that were in maybe one or two stock positions, or they were rolling the dice and they were living off that money or needed to live off that money that was tied to the market.

Meaning the scenario is you're able to pull out of your retirement plan without penalty or drawing off that money.

Or even living off that money in their taxable account.

The one thing that we need to say is that there are folks that are not retiring and are just investing right now and they are some the ones that are pulling out right now because it was part of their planning.

As for everyone else, the one thing that we always have to keep in mind in a time of crisis like or with major volatility, is that if you sell you take yourself out of the market, there’s typically one-to-two days or one-to-two weeks of that recovery time that makes up most of the losses, so it's not trying to time the market, it is the time in the market.

Most people don't realize this because they don't watch the financial markets everyday. This is what dollar cost averaging is all about. You buy when the market is high and buy when the market is low, meaning if you have a job right now and you're investing and that job is stable, then you keep investing because when it is low as you're going to get stocks on sale. When it is high you're not going to get them on sale but it balances out over time.

Right now this Coronavirus impact is purely tied to something not fundamental meaning that in 2008 there was an underlying situation which nobody expected. That's why you don't want to have a fire sale at this point because the minute that they come out with news from all these bigger cities that have been hardest hit such as New York; keep in mind that we've got vaccines on the horizon.

Remember the stock market does not like uncertainty.

Cindy has been making a lot of great points and in fact it reminds me of a story of someone that I worked with where she asked me to look at her account; she said I have $50,000 and I learned that she had all of it in a money market fund and I said what did you do? She said I panicked and I sold in 2008; and now this is ten years later and I said so you've had your money just sitting here all this time? This means that lost she out twice and she said what does that mean?

I said for one, when the market was down around 40% you lost all of those gains because you sold. You’re thinking I'm cool I'm sitting on this $50,000 if you kept the money in the stock market you would have made that 40% back; however, there is no way to realize that now. Part two is that the market went over and above that 40% loss and it's been well over 200% even to this day since the financial crisis in regards to the S&P 500.

Exactly just four months ago the market has never been this high even though we felt the 15 to 30% drop in the market over the last couple of months, we had a stellar year in 2019 which is why we like to illustrate long-term performance. If you sell now, you take yourself out of that ability to recover.

So it's fair to say that if you don't need the money and you're over five years from needing the money, then you're cool; just let it ride.

Let it ride and don't lose your long-term confidence in the market either. If you look too much at the risks involved in stock market investing in a single day or even a week or a month, it can send you another panic.

So let’s do a quick recap. If you’re five years or more out from needing your money what do you?

You stay the course.

If you are less than five years but over two years what do you?

You reevaluate what your needs are. I would say in the next one-to-two years.

Okay and if you are one-to-two years out, what do you do?

I think you just need to stay in cash meaning that you need to stay liquid.

The one thing that I want to point out is that your situation is unique to you, meaning that you need to do your own homework so that you can make your own decisions.

Remember this is all predicated on your liquidity needs, your time horizon and your willingness to take risks and/or your risk tolerance.

If you're in this position we hope that you take your time and make a good financial decision for yourself.

Episode Link:

Don't Panic Sell Investments in Market Downturns Such as Coronavirus

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