Stock Market Selling in Down Markets

Suzanna De Baca -- Expert Business Source, 1/16/2008 8:05:00 AM

Dear Suzanna:

With the current downturn in the stock market, many of my stocks and mutual funds have declined in value.  Should I sell and hold cash while I wait out the down market?

From Seeking safety

Dear Safety:

In volatile stock market environments, many investors take one look at their account balances and panic.  After a few days of down markets, it is human nature to wonder if you should cut your losses and run, but selling impulsively when a stock or mutual fund is down can be a big mistake.

Stock market corrections or periods when the markets are down are an inevitable part of investing.  Although it is impossible to predict when a decline will occur or how long it will last, most experts agree that reacting or trying to time the market is a strategy that rarely works.  Selling is the easy part;  deciding what other investment to go into and entering the market at the right time is much trickier.

In order to evaluate whether or not you should sell your stocks or mutual funds, it would be beneficial for you to first consider a number of basic points.

Is it the security or the market?  If your investment is down because there has been a fundamental change in the company’s health or management, or if fraud has been discovered, you may indeed want to sell.  On the other hand, if the security or fund has declined along with its industry group, holding it will prevent you from selling at the bottom and buying back into that industry or sector after it has started on an upward trend.  Knowing when to get back in to the markets is very tricky;  even professional securities analysts and portfolio managers have not been able to successfully time the markets on a consistent basis.  

Are you a long-term investor?  If you have a long-term plan for your investments, consider whether or not the specific investment still fits into that program.  Is this potentially short-term decline going to affect your current lifestyle or needs?  If the stock or mutual fund has good long-term prospects and you do not have an urgent need to liquidate, consider staying the course.

Do you have a sound asset allocation?  One of the ideas behind creating a well diversified portfolio with various types of investments across different asset classes, sectors, or countries, is to reduce overall portfolio risk.  Constructing a portolio with these different components increases the likihood that different investments will do well in different environments.  Are some of your investments holding up better than others?  If this particular investment was selected to play a specific role in the portfolio and is still representing that particular asset class, think about holding it.

If you don’t have a formal asset allocation, this may be a good reminder of how importance diversification can be to the long-term success of your portfolio.  Having adequate diversification can help prevent your entire portfolio from declining in reaction to different market cycles.  If you don’t have an long-term plan with a deliberate asset allocation, diversifying now may be help prevent portfolio volatility in the future.

If you do decide that selling is the right move for you, remember to take a look at potential tax consequences;  you may still have gains in a position even if it has recently declined.  It can be a good idea to consult with your financial and tax advisors before you make any impulsive decisions in a rocky market.

Suzanna de Baca is President of Private Capital Solutions Group.  She is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY 10004, (888) 600-4667.  Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Private Capital Solutions Group is not an affiliate or subsidiary of PAS.
PAS is a member FINRA, SIPC.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.