Why Do Many Investors Sell an Investment?
There is no single answer to this question. During bear markets or major “corrections”, many investors sell out of fear. The fear can turn to panic, which then feeds the fears of other investors. Others sell some investments to “rebalance” their investment portfolio. If an investor has a need for cash, and they don’t have a savings account, perhaps they lost their employment, and have no other way to cover an expense or life surprise, they often sell. This type of selling can be at the worst time if it is done when the market is headed down or has entered bear market territory.
We all would do well to take inventory of some of the reasons selling an investment during a bear, bull, or flat market with little growth. The following are ten of my reasons I don’t sell an investment.
Ex-Dividend Dates Are Near
Many of my investments pay a dividend. Most pay quarterly and some pay monthly. If a dividend is forthcoming as announced by the company’s board of directors, then selling causes me to lose that income. If the investment is a long-term holding, selling is imprudent and short-sighted.
The Dividend Yield is Growing
When the price of a dividend-paying investment goes down, the yield goes up. For example, as the price of AT&T’s stock dropped, and then dropped some more, the yield approached 8%. Yield is a poor indicator of value and quality, but a good investment with growing dividends becomes more attractive as the price of the share drops. That attracts investors like me. A little patience, and the demand for those shares often return in a very short period of time.
Dividends can be Reinvested at a lower Cost
Do you remember when stores had a bargain basement? I do. Our family often went to the basement to look for deals when I was a child. If I receive dividends at least quarterly, I can choose to buy more shares of that investment or some other investment at a lower price per share in the stock market basement. Who doesn’t like a bargain? When prices are going up, the price per share can make an investment too expensive. When the prices are dropping, it can be like buying quality cookware or branded jeans at a thrift store. With the exception of some ETFs in the UTMA accounts I manage for our grandchildren, I always take the dividend in cash. Then I can buy more shares of stocks or ETFs from the bargain basement.
Traders are Creatures of Panic, Fear, and Greed
Many of the “investors” are not investors. They are traders. They want to buy and sell their investment(s) today. If they see the bottom falling out of their investment, they sell. If everyone is selling, then the fear and panic increase. The reverse is also true. Prices can be driven up by greed and the desire for a quick profit. Most traders lose more than they care to admit. Therefore, I think like an investor and try to keep my “trading” to a minimum.
The Herd will Turn
What does up will come down. What goes down has a history of going back up. If I think about all of the different bear markets I have seen, including the recent Covid-19 scare, I remember that it didn’t take long for our investments to recover and then to continue to grow.
History (Says You Cannot Time the Market)
No one really knows when the market will stop dropping, when it will turn, and when it will keep rising. Many studies have been done that seem to indicate that far too many investors are very poor decision makers and cannot time the market. Think about it, you really don’t know what tomorrow holds. Will World War III begin tomorrow? Will a new swine flu or massive plague begin in New York City? Will inflation skyrocket and eat away at your buying power? You and I don’t know. Please don’t make decisions based on worry about tomorrow. Jesus said you don’t gain anything by worry. Worry is a losing proposition.
The Sky Is Not Falling
There will always be pundits or experts who claim to know what is going to happen with the market or with a particular investment. I like to hear the opinions of experts and advisors, especially if they can back up their claims with a strange animal called DATA. Some experts are perma-bears. That is, they always think the sky is falling. Sometimes the sky may seem to be pushing you down, but don’t become the slave of expert advice. Know what you own, why you own it, and stay the course.
Wise Investor Behaviors
You can learn from wise investors. Wise investors, for the most part, are not creatures of fear and greed. Warren Buffett, for example, is known for buying an investment and keeping it. Why does he do that through bear and bull markets? Because he is buying with a long-term perspective. I often remind new investors that you don’t buy your house at one price and then sell it a year later simply because it has increased in value by 15%. You also don’t sell it because it dropped 15% from when you bought it. Of course, if you are flipping houses, you might do those things, but you buy a home to live in it. Buy your investments to live in them.
You Can Reduce Long-term Income Tax Liabilities
I often tell new investors that I delight in down markets. The further down it goes, the better. There are at least two reasons for this. The first I already mentioned: I can buy more of the good investments that pay a growing dividend at a lower cost. But there is another powerful reason for those who have both a traditional IRA and a ROTH IRA. A down market is the perfect time to move shares of a beaten-down quality investment from your traditional IRA to your ROTH IRA. Each year I look for a time when an investment has been out-of-favor.
In 2019 I moved 500 shares of ABBV from my traditional IRA to my ROTH. At the time ABBV was trading below $80 per share. They are now above $135 per share. Since that time, I have received $6,278 in dividends in my ROTH IRA. Therefore, my investment has appreciated in value, and I am receiving tax-free income. I can also trade covered call options on the 500 shares, and I made an additional $259 in the last six months of 2021 with very little risk. My total investment is now worth over $28,000 more than it was when I held the shares in my IRA. This is like buying low so that I can reap the benefits of lower income taxes when I start to take RMD’s.
Smart Investors Buy during the Dips
The opposite of selling is buying. I have read books and letters by smart investors, including James B. Cloonan, Warren Buffett, and John C. Bogle. Cloonan’s Investing at Level 3 is a great resource. Bogle’s The Little Book of Common Sense Investing is required reading. Warren Buffett’s annual Berkshire Hathaway letter is full of great thinking.
If you had a reason for buying an investment, and it was a good reason, and the reason still stands, don’t sell it just because the market is turbulent or “crashing.” Buy more. Recognize the storm for what it is and steer your ship through the storm. If you think otherwise, you will join a host of other disappointed investors and traders.