Know your personal investing time frame
Even for those who know nothing and care little about the stock market, there’s something dramatic about waking up to the news that “trade was suspended in New York overnight”. Keep listening and you’ll hear that the US index “fell off a cliff”, dropping 7% upon opening before automated triggers kicked in and closed the market for an hour.
When accompanied by charts such as this one (used widely on ABC News this morning), the sense of adrenaline is heightened. Oh my gosh, something really bad is happening!
You might think it’s got nothing to do with you, but if you’re an Australian you’ll have superannuation, which means there is a high chance you actually are invested in at least one stock market somewhere in the world.
On the other hand, if you’re under, say, 50, you’re probably at least a decade off needing that money. And that means (using historical precedent as a guide here and in no way offering actual financial advice), you’re back to not needing to worry about it.
But that doesn’t mean it isn’t a good opportunity to learn a little about investing — you never know when it might help you make a smart decision.
You haven’t lost your money ’til you actually sell
The thing about your share portfolio is that it isn’t the same as your bank account.
If you wake up tomorrow morning and your cash savings have fallen from $20,000 to $10,000 overnight, you’ve got a real problem (and you ought to contact your bank immediately).
But if you take a look at your shares tonight and their value has dropped from, say, $20,000 a month ago to $10,000 today, you’re not necessarily any worse off while they’re sitting in your portfolio.
Examine this chart below of the Australian stock market (via its main index, the S&P/ASX200), which includes the lead up to and the falls of the Global Financial Crisis in 2008 and, notably, 2009.
Our local market hit its low point on Friday, 6 March 2009 (I’ve elegantly circled it in red).
If your shares had fallen from $20k to $10k and you’d sold on that day, you would have formally lost $10,000 of your money.
As the market started to go up again and everyone who held onto their shares saw their portfolios start to recover, you’d have been sitting there with your savings in your bank account stuck at $10,000 and no chance of making it up again with a very low interest rate.
If you’d waited even just a year, you’d have been able to recover at least 50%, taking you back up towards, say, $15,000.
And, as you can see, if you kept your money in the market all the way back up to recent times, you’d have fully recovered to 2007-levels by 2019.
(If you’re wondering what’s in it for those poor buggars who had their shares in 2007 though, and have only just, in theory, regained their position 13 years later, don’t forget that share market investing also delivers dividends and plenty of opportunities to invest actively in individual companies, which can give you a chance of even better (or even worse) returns. But that is definitely a topic for another day.)
Further reading: if you want to read a summary about the Aussie market and its drivers over the past 12 years, this AFR article is pretty useful.
It depends on when you need your money
The crux of the matter is that your decision around when to sell your shares (and when to buy them, for that matter) should depend on when you need your money.
Sure, advisers can smugly point to long-term charts about share price recovery and quote that old chestnut “it’s about time in the market not timing the market”, but none of that is much good if you need your money yesterday.
Two common scenarios I can think of:
- You’re about to retire and you want to start living off your portfolio
- You’re hoping to buy a home soon and you need every penny you can scratch together for your house deposit.
Generally speaking (and not specific to current events), if either of these two events are on your horizon in the next one to two years, most advisers will probably tell you to sell up (or sell some), and hold onto your cash or keep at least part of it in something less risky.
The basic question is: can you afford to lose your money now and still achieve your short-term goals?
Consider someone who started 2020 thinking they would put down a house deposit of around $100,000 later this year. If they’d had all that sitting in the share market, they might now have an amount closer to $80,000 — which could be the difference between getting approved for a loan or not later on.
On the other hand, if you’re not planning to use your invested money for four or five years, it might make more sense to hang on to it. And if your time frame is ten years or more, you’re good to change the channel off the financial news for a bit.
Sadly, for those who did need their money yesterday in our current scenario, it may be too late to put these kinds of reflections to work.
And even with the benefit of this wisdom, getting the ‘exact time’ right of when you want to sell is tricky. Even under more ‘ordinary’ trading conditions, six months either way can make a reasonable difference to your profits or losses. No-one enjoys the feeling of selling and then seeing their aforeheld company jump 10% in value on a good earnings forecast or strong global economic update. Being too nervous with your money will also not help you build long-term wealth.
Not to mention your individual circumstances, marginal tax rate, spousal earnings and about a hundred other little things that impact your ultimate end-of-year Australian Tax Office situation.
All of which goes to say, seeing a good financial adviser — or at the very least reading up on reputable sources as widely as you can — is probably good advice.
For today, I recommend simply grabbing the popcorn and sitting back to watch the show.
