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Should You Sell When the Stock Market Tumbles?

This article was written by in Investing. 12 comments.


Although stocks are opening higher this morning, yesterday brought more devastation to the stock market. Stocks are now down 13 percent over the past week and down 11 percent for the year. This is bad news for stock investors, with the worst short-term performance since the market crashed at the beginning of the recession. This is, in most investor’s minds, the second dip in the “double dip” recession that people have been fearing for the past few years.

Ron Lieber, a financial columnist at the New York Times, explained who should use this as an opportunity to sell. Buying stocks after they’ve increased, the point where the media seems to agree there’s stability in the market, and selling stocks after they’ve decreased, the point where the media has decided there’s no hope, is a sure way to lose money in the long run.

If these major swings in the stock market keep you up at night, you shouldn’t be investing in the stock market in the first place. The reason stocks live up to their long-term growth potential is because they can be risky in the short-term. These swings and occasional, cyclical recessions, should be expected. Most people, those who aren’t interested in investing in their own business (an even riskier proposition) or trying to get rich by renting out property, the stock market is the only avenue for building wealth over the long term. This is the path to a comfortable retirement.

There is a lot of criticism of this point of view — the same advice that’s heard in the financial media every time there’s a significant stock market decline. Here are some typical responses from people who are offended by this viewpoint, and to some extent they may be right.

Note that these are the typical responses, not my opinion of the situation.

  • The game is rigged. Only institutional investors or large investors can succeed in the stock market. The small-time average investor cannot succeed because the stock market is designed to favor those who have more buying power. The more money you have, the more investment options and better deals available.
  • It’s a media conspiracy. The financial news media has been encouraging investors to continue buying because this is how financial companies make a profit. Whether you buy or sell, the financial industry profits, so they don’t care which you do as long as you’re continuing to make transactions. The media want the financial industry to survive and thrive so they have another day to write about it.
  • Our political leaders want the market to fail. The nature of a two-party political system is competitive. Usually this is a good thing, but if one party has the possibility of bringing the economy down and blaming it on the other party, expect the politicians, whose only desire is more power, to take advantage of the situation. Never mind that millions of citizen’s finances could be ruined in the process.
  • This (and every) stock market crash is a result of too much (or not enough) government regulation. This is the argument for and against a complete free-market economic system (which we’ve never had).
  • The stock market is controlled by computer trading. Many of the large investors use models to trade, which tend to exacerbate sell-offs. If a program is designed to sell investments when they lose a certain percentage, the automatic and quick sale will continue to pull the price of a share down, triggering more computer models. How can an individual investor who busy and sells by researching a company and initiating a trade online keep up with the faster-than-light trading techniques that move the market?
  • We’re entering a new paradigm. Each time the market suffers, there is a concern that we are entering a new era — a period of time when the fundamental concept of long-term performance can no longer be expected from the stock market because the economy is now somehow different.

Whether or not you succeed in investing in the stock market is defined by its performance leading up to when you sell. In the last recession, many retirees saw their nest egg plummet. The market may still have been up overall for the twenty or thirty or forty years they were investing, but when they had the most money in the market, as they approached the date of retirement, the bad performance was much more damaging. When you look at your portfolio in terms of dollars, that’s a valid conclusion, but retirees who need to access the value of their investments for cash could minimize the losses by only withdrawing small amounts over time, giving the market a chance to move up again.

Now that I’ve veered away from the concept of working at a corporate employer for the rest of my pre-retirement life, I’m not sure how my plans fit into the concept of investing until retirement and walking away from work one day. Most of my wealth is in my business — a risky business. I’m still investing in retirement accounts, recognizing that even if I decide to stop working early, I can’t touch these funds without incurring penalties until I’ve aged to the point the government has decreed as retirement age.

My plans haven’t changed due to the latest stock market downturn. I initiated a transfer yesterday to move the remainder of my money market investments in Vanguard to the total stock market index. In addition, I confirmed my monthly investment in my Individual 401(k). There may be some losses ahead in the short term, but I still think that the stock market will be the best option for this money over the long term.

New York Times

Published or updated August 9, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar kaidez

No, people should not sell when the market’s down. Next question?

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avatar shellye ♦107 (Cent)

As you noted in the opening sentence of your Facebook posting, “…selling only makes losses real.”

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avatar lynn ♦155 (Cent)

I have a small stock account (under 10000). I have it only because DH chose it 27 years ago. The end result will be nothing will be made off of it. I personally was taught not to use the stock narket to make money. Paying for trades and being at the mercy of a less than perfect system is not my idea of prudently handling my resources. JMHO.

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avatar wylerassociate ♦162 (Cent)

people shouldn’t sell when the market is down but there is such an irrational fear over every single post of negative news. I know things are awful now but the talking heads on CNBC (who got the 2008 financial meltdown wrong) make things much worse.

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avatar shellye ♦107 (Cent)

This is so true. The hysteria I’ve watched on the business news channels over the last couple of weeks is enough to make even the most seasoned investor throw up his hands and say, “I’m done”. I have always been a fan of CNBC but it’s been hard to watch lately.

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avatar krantcents

When these situations occur, there is a lot of discussion of what to do. If you were happy with your asset allocation before, you should stick with it. Even if your risk tolerance changed, now is not the time to make big changes.

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avatar SavingFreak

Since I am decades from retirement I usually try to up my investments when the market goes down. This means I actually am buying at the bottom and riding the wave back up.

A rising tide raises all ships and a sinking one lowers them all. Just think of it as a bunch of healthy companies just had their stock go down for no good reason. That means IT’S ALL ON SALE!!!

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avatar csdx

Let me take the contrary view: yes sell when it’s down, at least in taxable accounts. Then take the losses as a tax write off. All you need to do after selling is immediately rebuy into a similar fund/index (but not too close to hit the wash sale rules). Then you can realize losses to offset you tax liability for the year. Admittedly this is more tax move and not so much the same as panic selling when the market drops.

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avatar Cejay ♦1,521 (Half-Dollar)

People should keep their money in the market when it is down. If at all possible, now would be a good time to buy some more shares.

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avatar Ceecee ♦53 (Newbie)

Agree with some of the others, I wish I had more cash free to buy right now. I would buy a beaten down dividend paying stock. I would never sell after the market fell like that. If I want to protect a gain, I can use a limit order.

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avatar skylog ♦368 (Nickel)

as shellye stated earlier (or pointed out what you stated) when the market is down, one’s losses are not realized unless one sells their investments. as time has proven, as i am behind in my site-reading, the market has gained back much, though not all, of the points lost. this is not to say that this will happen each time, or even a majority of times, but it is a very important point to remember.

as for myself, clearly, it may depend on the situation, but i am more likely to add to my positions during times like these. i did during the last crisis, and i did again through this “mini” crisis. i am not trying to market time, per se, but given the percentage drop, it just seemed the best choice. i did not get the “bottom,” but fairly close, and given my long-term time frame i thought it was a wise decision.

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avatar qixx ♦1,895 (Half-Dollar)

you should be buying when the market is down. isn’t that part of how buy low sell high works???

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