Buy High, Sell Low: A Fast Way to Broke
We’ve all heard the saying “buy low, sell high.” It’s good advice that many of us like to quote at each other. However, when the panic sets in, and emotions run high, many of us throw good advice out the window. Even if the stock is low, we are frenzied, sure that the end has arrived, and we follow the herd as the cry is raised: “Sell, SELL!”
Unfortunately, when you sell an investment in a panic like that, chances are that you bought at a higher price earlier — when you were feeling good about the way things were going. Once you sell at that lower price, your losses are locked in and you have a problem. Even getting a tax deduction for your losses cannot help if you are consistently losing money investing. Locking in the losses from your panic selling can be a fast way to going broke.
Resist the Urge to Sell in a Panic
When the stock market appears to be crashing it is easy to get caught up in the moment. We have seen a lot of volatility recently, and all the ups and downs can spook you. It’s especially easy when the financial media is pumping hysteria into the public psyche. But before you log on to your online brokerage and sell everything, stop and think.
Photo by Sento via Flickr
Before you sell, ask yourself these questions:
- Why do you want to sell? Examine your emotions. Figure out why you are selling. Be honest. If you are selling because everyone else is, that could be an indication that it’s not the best time to sell. If you are selling because the market is dropping, consider that it is likely to rise again. Maybe you should be buying.
- Has something changed fundamentally with the investment? When the stock market is selling off, just about everything is lower. A lower price isn’t justification for unloading your investment. Instead, look at the fundamentals. Is something different? If there has been a recent shake-up with management, if the balance sheet continues to shrink, or if the company is losing market share, that might be a reason to sell and invest in something with better potential. But you might want to wait until all the panicking is done, and the price has recovered somewhat. If the fundamentals are relatively unchanged, selling might be a bad idea.
Back in March, Bloomberg reported on a study that showed that panic selling almost never pays off. The study looks at how panic selling compares with sticking to the S&P 500 over time. The difference was astounding, especially when looked at during the 1990s and 2000s. As the stock market has become more volatile in the last 20 years, panic selling has been less effective than showing patience.
Remind Yourself of Why to Avoid Panic Selling
Here are some ideas that might be able to help you as you remind yourself that panic selling is a bad idea:
- Consider dividend stocks: Dividend stocks can be reasonably stable, and the fact that a company is paying a dividend yield of between 3% and 6% (especially if the dividend increases yearly, as with dividend aristocrats), there is a good chance the balance sheet is solid.
- Invest in index funds: When you invest in index funds, you are getting an investment with more diversity. An all-market fund, or a fund based on a broader index, can help earn over time, as the market historically does, rather than worry about the volatility of individual stocks.
- Stop checking obsessively: Don’t check your portfolio performance all the time. Rebalancing once or twice a year is usually sufficient for most people, and you won’t drive yourself crazy wondering if now is the time to sell it all.
- Don’t listen to “experts” in the mainstream media: Panic and sensationalism increase ratings and ad revenues for media outlets. Much of the freaking out is hyperbole meant to draw viewers. Try to ignore all that noise, and instead focus on what works for you.
Yes, there is always the chance of loss when you invest. All the best research and strategizing in the world won’t change that. But if you panic into selling low after buying high, your losses will be bigger — and locked in.