Anyone panicking over the stock market crisis has been advised that panic selling is almost always a bad move. Mr James K. Glassman, a fellow at the American Enterprise Institute, wrote in the Washington Post that it is indeed almost always a mistake to sell, whether in a panic or not. He points to historical evidence which shows that markets tend to recover, even from steep drops, fairly quickly. The last serious bear market occurred between August 25th and December 4th, 1987, when the Standard & Poor's 500-stock index lost 33.5 per cent of its value. The S&P recouped that loss by July 1989.
When you feel the urge to sell, Glassman says don't. Instead, take a deep breath and relax.
There may indeed be decent reasons to dump a stock, but consider them carefully and in a relaxed atmosphere, he advises.
And, even after contemplation, when you're ready to sell, remember these reasons not to.
Firstly, market timing doesn't work. A decision to sell is a bet on the near future. You are predicting that the price of your stock will continue to fall, rather than doing what stocks traditionally do, which is rise at an average annual rate of 11 per cent.
The other reason market timing does not work is that the stock market is volatile. It zooms up on only a few weeks a year. You can never tell which they will be, but if you miss them your returns are greatly diminished. It is hard enough to make one investment timing decision: when to buy a stock in the first place. It is impossible to make three: when to buy, when to sell and when to buy again.
Secondly, selling is expensive. You have to pay commissions, and you lose a bit on the spread between the stock's bid and asked price. More important, you get hit with capital-gains taxes.
Finally, stocks are the best investment. When you sell, you need to put the proceeds somewhere. But what better place can you find than stocks? There is none over the long term. You should never have been invested in stocks in the first place if a decline in the market is enough to push you into cash or bonds.
