I see this question coming through on Google all the time: Should I sell my stock in 2011?
Two letters: NO.
There. That was easy. But I’ll explain why.
Markets are choppy right now because speculators are nervous. You shouldn’t be a speculator. You should be an investor. There’s a difference.
Here’s the problem. If everyone reacts to that nervousness and sells their stock, it becomes a self-fulfilling prophecy. Stocks drop further, banks stop lending money, companies try to slash costs to prop up their stock values so they stop hiring or lay more people off, then those newly unemployed people have difficulty finding jobs because nobody else is hiring, and then consumer spending drops because unemployed people spend less money than employed people, and that’s how we get into recessions and depressions.
More often than not, that’s how it happens. One thing leads to another, all because enough people got scared.
Nobody knows if we’re headed into another recession, but the way the markets are behaving, I don’t think so. Because stocks drop one day and jump the next. Gas prices drop 20 cents in a day, then jump 20 cents a few days later.
What’s happening? Speculators are having a field day. And people are nervous enough that it seems like the markets are reacting to anything but sports scores. Or maybe they’re reacting to that too, and that’s why nothing makes sense. I guess that would explain a lot.
But you don’t want to be a speculator. Speculating is fine if you’re a high roller with lots of money to play with, but if you’re asking whether you should sell all your stocks, you probably don’t have a lot of money to play with. Speculators buy and sell things on short notice based on what they think the market is going to do. Investors buy things and hold them for decades while they increase in value.
So, no, you shouldn’t make a phone call and convert all your 401(k) holdings to cash when the market drops 400 points. Hang tight. Better yet, if you can afford to, increase your 401(k) contributions a bit. Even $10 or $20 per pay period can prove worthwhile, especially if you’re relatively young.
Even the volatility on gas prices can save you money, if you’re careful. If you need gas and you just saw gas prices jump, buy no more than a half tank of gas. When gas prices drop suddenly, buy as much as you can. If you’re down a quarter tank and gas prices are still low and you have time to stop and top off, it’s probably worth doing. Don’t go out of your way to time the market, but when you’re in position to take advantage of the market being down, do it.
Don’t get me wrong. Thanks to herd mentality, you and me holding onto our stocks and buying more isn’t going to stave off a double-dip recession. If it’s going to happen, it’s going to happen. But you can decide whether you’re going to be someone who makes money in a recession or loses money. Keep your stocks and buy more while they’re down, and you’ll make a ton of money off the rebound. Sell now and buy again after the recession, and you’ll probably lose money.
It’s counter-intuitive, but it makes sense when you think about it.