After a nice run up like the past 12 months, you may be tempted to sell and take a bit of profits. Think long and hard first.
If you have a workplace retirement account or brokerage account with investments in the USA stock market you may be tempted to sell now.
Volatility is the Price You Pay for Returns
You need to take some risks in order to be eligible for a larger return. The problem with that reality is that no one enjoys seeing their investments decline in value. Even if you don’t know anything about investing or understand the mutual funds in your retirement account, you understand a 16.02% gain in your Vanguard Total Stock Market ETF (VTI). You realize that a 16% return is much better than the 0.01% return you’re earning on the cash in your savings account.
Not only are investors usually happy with double digit gains, but after large gains, their anxiety and fear frequently kicks in.
What if the stock market declines? I’m okay with volatility as long as it is going up!
After a nice run up like the past 12 months, you may be tempted to sell and take a bit of profits.
Should You Capture Some Gains in your Investments Now?
The answer to that question depends upon several factors. Will you need the money in your investment account within the next 5 years? If so, definitely, take some gains. In fact, if you needed the money in your investment account within 5 years, it shouldn’t have been in the stock market in the first place. The stock market is way too volatile for any short term funds.
If the funds in your retirement account are for long term goals; retirement, college for junior in 13 years is it a good time to sell and capture some gains?
That question requires two separate decisions. Obviously, you could sell, capture the recent gains. But with interest rates in the basement, your cash would get eaten up by inflation over the next 10+ years and be worth a lot less when you really need it. So question one is should you sell now? Question two is, when to get back into the stock market?
If you sell now in an attempt to capture some gains, and the market declines a bit, you’ll be quite proud of your decision. But how will you know when to reinvest your funds into the market?
That’s the real problem, how will you know when the market is ready to rebound after a decline.
The answer is, you don’t know. The greatest gains in the stock market are made in a proportionately few days. If you miss the best 3-5 weeks in a year, you may miss the majority of gains for the year.
Timing the market, or jumping in and out requires you to judge correctly twice, once in when to sell, and the second time, when to buy.
Are you prescient enough to judge correctly twice?
What the Smartest Investors Recommend
Investment professors (myself included), John Bogle (founder of the Vanguard Fund Group), and Burton Malkiel (author of A random Walk Down Wall Street) advise investors to keep their funds in an asset allocation in line with their risk tolerance and stay the course. Over time, if you believe the USA and global community will continue to prosper, then stay invested, and accept that the investment markets are volatile and over time, have trended upward.