How to handle the market sell-off

After five or so years of eerie calm, stock markets have kicked off. Should investors sell or stay put?

After five or so years of eerie calm, stock markets have kicked off. Global markets have taken a beating over the past month. Technology stocks are leading the losses.

We’re seeing a bunch of alarming signals together. The Vix, which measures volatility, had its biggest monthly rise since 2015.

Stocks fell in Asia, Europe and the US. Semiconductors, which are seen as an indicator of overall economic health, fell more than 15%.

Gold, the traditional safe haven in tough times, rose slightly.

It’s enough to make a person anxious. So what should we do?

Strap in

Art Cashin is a famous man-about-Wall-Street. He’s been a New York Stock Exchange floor trader (one of the guys in the brightly coloured jackets) since 1959.

Cashin once told Barry Ritholz a yarn about the Cuban Missile Crisis:

“Everyone was on edge as the U.S. and Soviet Union approached the brink. One day, word began to spread that Russia had launched its nukes, which would arrive in 11 minutes. A trooper to the end, Cashin ran around the exchange floor trying to sell short, but was unable to do so. The 11 minutes passed, but nuclear annihilation never came. Soon after, Cashin reported to his boss. He told him what occurred, and was told that in the future, upon learning of the end of the world, the proper trade is to go long, not short.

He asked his boss, Why go long if the world is ending? “It never does end,” his boss told him, and even if it does, “who are you going to settle the trade with?”

He sounds nuts — but he’s right. It’s perfectly normal to want to flee the markets during a crisis. You think, “I’ll get out while I still can. Then I can buy back in once the dust settles.”

The reality is that aggressively timing the market almost never works. Here’s why.

Keep your cool

The problem with selling your stocks in the hope of buying them back more cheaply is that… it’s very difficult to buy them back more cheaply!

If the market rises, you won’t want to get back in because you’ll be guaranteed a loss. And if the market keeps falling you won’t want to get back in because, well, the market is falling.

This little game over at QZ.com makes the point better than I can. It shows a random 10 year period in the S&P 500, the US’s biggest stock market index. The challenge is to “time the market” by selling stocks and then buying back in at a lower price.

Tried it? Are you convinced yet? I reckon I lost money four times out of every five tries.

That’s not surprising. Stocks go up. That’s just what they tend to do. Since 1947, the S&P 500 rose in 80% of calendar years. And it rose by an average of 202% in every ten year period.

If you sell all your stocks during a crisis, there’s no way of knowing whether things are about to get worse or about to get better. That’s un-knowable.

The only thing you can know for certain is that stocks tend to go up over time. By taking your money out of the stock market, you don’t get to benefit from that.

There’s evidence that “timing the market” costs investors a frightening amount of money.

One study by Geoffrey Friesen and Travis Sapp estimated that over 30 years of investing, attempting to time the market knocks more than a third off people’s portfolios. A third!

This might be the best investment advice you get all year. To retire with a 33% bigger portfolio, resist the urge to call your broker. Keep your cool. And trust the strategy.

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