Investing

Selling stocks now could be 'the most expensive mistake of your investing career' — here's why

Twenty/20

If the stock market's lurches up and down have you feeling queasy and ready to sell your investments, professional investors say: Beware.

No matter what's happening in the stock market, it's always a good idea to ask yourself some questions before selling an investment. That's especially important if you're motivated to do so out of fear, be it about your own financial situation or of a further slump in the market.

"As market analysts, we try to help people to not make bad decisions," says Randy Frederick, vice president of trading and derivatives for the Schwab Center for Financial Research, and right now, that means helping people not panic and sell as a result of market volatility.

Some people hope to sell investments now in the hopes of jumping back in at even lower prices. But even professional investors often end up guessing wrong. It's easy to miscalculate and miss out on the bulk of the market's eventual rebound.

The bottom line is, "selling your stocks may be the most expensive mistake of your investing career," says Jamie Cox, managing director at Harris Financial Group.

Here are three different reasons you may be tempted to sell and what experts would say in response to each.

Scenario No. 1: You want to minimize investment losses

Odds are, the value of your investment portfolio has dropped significantly in the past month. The extent of those declines will depend on your mix of different assets, like investments in stocks versus bonds.

The S&P 500 has tumbled about 28% from its all-time high on February 19. That's nearly the same as the average decline in the past 12 bear markets since World War II, according to analysis by CNBC and Goldman Sachs. At current levels, the S&P 500 has basically wiped out all of the gains since President Donald Trump took office in 2017.

The problem is, no one knows how much longer the market turmoil will persist or how quickly the market will rebound once it does. Professionals on Wall Street still expect that the market will recover in the second half of the year.

That said, they expect more uncertainty in the near term. A gauge of volatility, known as the VIX, just spiked to its highest level ever, surpassing its peak in 2008 during the financial crisis. 

If you sell investments now, you'll have to pay capital gains taxes on any profit. If your income is $50,000, that rate will be 15% if you've owned the asset for more than a year and 22% if you've owned it less than a year.

Say you sell $500 worth of investments at a profit subject to that 15% tax rate. That means you effectively have less buying power, only $425 after taking into account the government's cut, when you want to invest again later.

Because the health aspect of this crisis is unprecedented, comparing what's happening now in the market with prior crashes is "very tricky," says Eddie Perkin, chief equity investment officer at Eaton Vance. Still, until there's more clarity on that front, the advice he's giving his team is: "Don't get sucked into the conversation about where is the bottom, because no one knows."

Scenario No. 2: You're worried the market won't recover

The current bear market in U.S. stocks is the 13th since World War II, and you can expect to experience these types of declines about a handful of times during your investing lifetime. That said, knowing that one is coming doesn't make experiencing it much easier.

Only 22% of people say they won't touch their long-term investments no matter the extent of a market decline, according to a recent survey by Magnify Money of 740 Americans who have a retirement savings account. And yet that's just what experts advise doing. 

Veteran investors have endured worse and could remind you that the market has always recovered. Two prior bear markets, one in 1987 and the other in 2007-2009, are getting a lot of attention lately. Those periods saw the S&P 500 plummet as much as nearly 57%, only to recover a few years later.

Focus on that potential opportunity cost of missing any eventual market rally — and consider adding more money to your portfolio, experts say.

"Think of this as the sale of the century instead of being afraid," Cox says. "This is definitely not the time to be trading. This is the time to be accumulating." 

Scenario No. 3: You're worried about your financial situation

Many Americans are grappling with uncertainty about their employment situation as a result of the coronavirus outbreak. As of March 14, 18% of American workers said they had been laid off or their work hours had been cut, according to an NPR/PBS NewsHour/Marist poll.

If you need cash fast, you may be tempted to sell investments. Experts suggest you start, instead, by assessing the options at your disposal with existing accounts. The best place to begin is with an emergency or rainy day fund, if you have one. "Your emergency fund is for times like this," says financial advisor Amy Shepard of Sensible Money in Arizona. 

After that, consider other options like CDs (certificates of deposit), health savings accounts (HSAs), and short-term investment accounts.

Try to avoid dipping into your retirement accounts, like a 401(k) or an IRA, because you may have to pay a 10% penalty plus income tax on the amount you withdraw, and you could miss out on decades of growth. Shepard says retirement accounts should be your "absolute last resort" if you find yourself in financial trouble. 

Staying calm during a market that's anything but

Because the stock market is likely to remain volatile in coming days or weeks, it may be useful to adopt some techniques espoused by behavioral experts. Those include using visual aids (like charts or sketching out your goals) to keep perspective on the market's long-term investing merits or practicing self-care and focusing on something other than your portfolio.

Finally, there are some proactive things you can do now to prepare for a rebound. Focus on three basic rules of investing: Diversify your portfolio to include a mix of different assets, dollar-cost average to spread out your purchase price over time, and rebalance to ensure your portfolio aligns with your risk tolerance.

In addition, check to see if you're reinvesting dividends, or the periodic payout of earnings that companies share with investors just for being shareholders. By reinvesting those dividends when the market's falling, your potential for future gains becomes larger, says David McInnis, a certified financial planner and the co-founder of East Paces Group.

"The advice we're giving clients is: Do not panic, do not make emotional decisions with your money," McInnis says. "Think it out before you make any big changes."

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