Let's talk about selling – when should you sell and when should you stick? Specifically, we're talking about three very different and distinct variations on the question. The first is capitulation. This is when you sell and go to cash because your view of the market is so negative or because the emotional pain of being in the market is so great that you feel compelled to sell stocks and hoard cash - financial suicide.
The second is market timing. This is when you try to shift your money between asset classes based on your opinion about what's going to happen in the future. And the third is changing the investments within your asset allocation, which isn't selling, so long as the new asset has a similar potential for gain.
When I hear people talking about selling their portfolio and going to cash now, very often it is accompanied by a statement to the effect that the period we are in is somehow different. This is something Nick Murray (one of my favorite writers) has come to call the "illusion of terminal uniqueness." This particular instance of it is marked by the almost ritual repetition of the phrase “the worst economic crisis since the Great Depression.”
(Remember, just because they say it doesn't mean it's true. What newspaper or news network ever attracted eyeballs by blaring the headline, "Tomorrow Will Be Sunny and 80°"?)
Now don't get me wrong. I am not trying to minimize the severity of the current economic downturn. But I am trying to highlight the human tendency, when we are faced with events that shake us to our core, to see them as being impossible to solve because this time is somehow different than anything we have experienced before.
Try to remember, if you can, what it was like in this country after September 11th. The phrase of the day was “This is our generation's Pearl Harbor.” We were absolutely certain that this was World War III, more attacks were coming any day and that the economy could never recover from such a staggering blow. Heck, that day, seven days or so after the attack, or whatever it was, when they tried to open the stock market … no one was even sure that they could get it open. That was the extent of the disarray at the time, remember?
Think back. I remember it very clearly. I remember everyone talking about how everything in our lives had changed and that we would never feel safe again. I am sure I felt That way too. I remember saying to my husband how weird it was. How I felt like I was swimming in Jell-O. Everything was just so foreign. But there is a difference between feeling it and acting on it. That's the difference between a successful investor and an unsuccessful investor.
Similar to what I'm doing today, I used all of my radio advertising on KRLD to urge investors to buy when the market finally reopened, not sell. I told them I was going to be a buyer on the open and I was. When my clients called and asked if they should continue the Snider Method, my answer was unequivocally yes. And when they said, “But surely this is different. Are you out of your mind?” I said, as I do today, "This time is never different." Now here we are, and isn't it amazing how all the catastrophic consequences we worried about in the aftermath of September 11th have, for the most part, never materialized?
While the circumstances were certainly different, both created the same psychological effect – "the illusion of terminal uniqueness" – and when this happens, we lose our ability to put events into any kind of rational context. We overreact.
In fact, many of the very things voters so recently pilloried George W. Bush for, were knee-jerk reactions that seemed very reasonable at that time, in that moment of gripping, all-consuming fear. But we look back today and think better of it. In retrospect, those gut reactions led us to do some things, as a nation, we regret.
If you want an example of an economic crisis, Think back to the early 80s. We had had a decade and a half of stagflation, something many economists said was impossible until it happened. The consumer Price Index tripled while the Dow Jones industrial average went nowhere fast. Inflation was accelerating, unemployment and interest rates were rising, incomes were declining and poverty was increasing.
In 1979, the Iranian revolution led to a tripling of oil prices. In a slap to our national pride and sense of well-being, hostages were taken and held at the U.S Embassy in Tehran.
Organized labor staged crippling strikes. Business Week ran a cover story titled - wait for it - "The Death of Equities", which reminds me of the head of the patent office, in 1840, saying everything which could be invented has been invented!
Gold priceswent up to $860 an ounce which would, by the way, be the equivalent of gold at something like $2150 an ounce in today's dollars . The yield on the 30 year treasury was north of 14.6% and unemployment peaked at 10.8%.
It's not important how this, "unprecedented and therefore terminally unique and therefore insoluble crisis," was solved. The relevant point is that it was, as was every economic and financial crisis before it and since. The other important point is if being in cash, during a period that the risk free rate of return on cash was double-digits was the wrong answer, it is an even worse idea today when the risk-free rate is zero!
This is the danger of the four most dangerous words in the English language – this time is different. When we are in the middle of these crises, we always think they're different. We always think the fundamental rules of investing, finance and economics have been suspended. That's because the exact facts and circumstances surrounding them are always different.
But here is what is never different: Regardless of your political or economic views, the one constant is this country's resilience. No matter how messed up we are, either as the result of our own doing or someone else's, we always have and always will rise to the occasion.
And how does this translate into whether to sell your portfolio and hide in cash? To sell now and hoard cash is to be gripped by irrational fear and as Franklin Roosevelt said those many years ago, “The only thing we have to fear is fear itself.”
Couldn't have said it better myself.
Muray, Nick. "The Illusion of Terminal Uniqueness." Nick Murray Interactive March 2009: 1,2.
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