Reasons to Hold
Published On: January 27, 2022
Written by: Ben Atwater and Matt Malick
When markets are volatile, as they certainly have been this month, investors can feel pressure to sell stocks. Behavioral finance studies indicate that investors feel the pain of loss more acutely than the joy of gains. So why not sell now to avoid further pain?
Our clients own equities only if they have an appropriate risk tolerance and long-term time horizon, so with that prerequisite, here are four reasons to hold steady through this round of volatility:
Nobody can predict the future. Will inflation get worse? Will Russia invade Ukraine? Will a new COVID variant strike? Will stocks crash? Everyone has an opinion about what’s coming but we are all just guessing, even if we think we are not. History shows us that stocks offer robust long-term returns but at the cost of short-term and unpredictable volatility. The only way to realize those long-term gains is by riding out the volatility.
To time the market, you have to guess right twice. Even if an investor gets lucky and exits the market shortly before a crash, when does he get back in? The COVID crash of 2020 was a case study in the impossibility of timing the market. Nobody expected markets to fully recover and reach new highs just months after rapidly crashing. Not only is the timing of a bear market unknowable, so are its duration and severity.
Inflation hurts your real returns. With inflation elevated and no relief in sight, the minimum return that investors must earn in order to realize real (inflation-adjusted) gains is much higher. Cashing out of the market and sitting in cash is guaranteed to earn virtually nothing and ensure that your money loses its purchasing power over time. And since attempts to time the market are likely to lead to even worse returns, investors have little choice but to ride out market fluctuations.
Selling can mean paying capital gains taxes. In taxable accounts, cashing out often means realizing hefty capital gains. For our long-term clients who have been invested for many years, the capital gains taxes that would result from a major portfolio liquidation is often a non-starter.
Market volatility is never easy to endure, even when we understand the logic behind staying invested. If you have questions or concerns about your portfolio, please do not hesitate to contact us to discuss your specific investment strategy and financial plan.