Instead look for rebalancing opportunities.
Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.
Question: What does your firm do when the stock market takes one of its big nosedives? Do you go to cash, or do you just ride it out?
Ric: Think about what you just asked in the simplest terms. You’re really asking whether one should sell when the market goes down. That’s a classic mistake made by millions of investors. We don’t do that. But we don’t just “ride it out” either. Instead, we do something smarter: We typically look for rebalancing opportunities.
On Jan. 26, 2018, the Dow reached 26,617, an all-time high. Investors were euphoric. Fast-forward to the week of Feb. 5, 2018. By the end of the week the Dow had lost 2,426 points, or 9.1 percent of its value from its all-time high. A large number of investors sold their stock funds — Alight Solutions’ 401(k) Index said on Feb. 5, the day the Dow suffered a 1,175-point decline, retirement savers moved money from the stock market to money market and fixed income funds at a rate 12 times higher than average.
Perhaps you’re thinking, though, why not sell before the market goes down? There’s a reason why not: Nobody knows when a nosedive is coming, and if you make a lucky guess and get out before the market nosedives, you’d have to be lucky again and guess when to get back in. It’s extremely difficult to get both calls right: when to sell and when to rebuy.
Plus, market downturns are times when you can consider many stocks as being “on sale.” If you were listening to my radio show during the crash of 2008 and 2009, you’ll recall what we were saying: “This is the greatest buying opportunity of a lifetime.”
Think of it this way: If you have a favorite flavor of ice cream and suddenly you see it’s on sale for half the regular price, are you going to take back the ice cream that you bought last week or buy more right now at the discount? I hope you’d buy more!