With the publication of Warren Buffett's opinion piece in the New York Times, we'd like to revisit the question of selling equities into the maw of this growling bear. As we've written recently (here and here, for example), the big problem with selling at these levels is how and when investors would return to the market.
CNBC flashed a couple classic Buffett quotations this morning. This one is especially apt: "Those awaiting a 'better time' for equity investing are highly likely to maintain that posture until well into the next bull market." There's a basic, profound truth in this observation, one reflected in Dalbar's ongoing work on investor returns falling short of market returns (and short of their own funds' returns).
The issues here are straight out of behavioral finance: Loss aversion, regret avoidance, euphoria, despair.
Our general suggestion is that investors not liquidate at these levels. And those who have cash available, regardless of whether they've held that cash through the downdraft or raised it more recently, should establish a clear discipline for reinvesting it consistent with their risk acceptance and overall investment objectives.
An example would be to divide one's cash holdings into fourths, let's say, and commit to investing each of those chunks on a set schedule (say every quarter for the next year, or every month for the next four) whether the market goes higher, lower, or nowhere at all. If the market goes higher, you don't miss out on all of the rebound. If it goes lower, great! You're now reacquiring the merchandise at more attractive prices. If it goes nowhere in particular, you're back in the game after paying only some modest transaction costs.
The key here, as always, is elevating discipline over emotion. Investors once again feel burned, and that feeling is entirely understandable. They have been burned! But they shouldn't let their emotional demons exacerbate the problem. Read Buffett, and think hard about the implications of his simple, deep insight:
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
A sense of wariness isn't all bad. But investors shouldn't let caution turn into fear and fear turn into paralysis. By the time you feel that reassuring burst of confidence, it'll be late in the game once again, just as it now for panicked sellers.
Warren E. Buffett, "Buy American. I Am." New York Times, October 16, 2008