Panic Selling? Timing the Market?
The recent market volatility has provided investors with a “teachable moment” regarding the unintended consequences of trying to time the stock market or selling shares in a panic.
Let’s say that on January 2, 2020, an investor has 150 shares of SPY. The value of those shares would be worth about $49K. Life is great. 2020 is looking like it’s going to be an amazing year. We are all going to crush it!
Fast-forward 2 months, and the grim news surrounding Covid-19 has investors running scared.
On March 22, our theoretical investor wants to stop the bleeding and decides to sell the entire position, netting about $33K.
Our investor is now sitting on cash and must decide when to redeploy the funds into the market. The investor is hoping for a continued decline in order to purchase more shares at a lower value.
Unfortunately for our investor, the opposite happens. The value of a share of SPY increases rather significantly. Using some arbitrary dates for example, if our investor buys SPY shares on April 6, only 126 shares will be acquired (or 16% fewer shares than the original 150 shares held at the beginning of the year). If the investor waits until April 14, only 117 shares will be acquired. (or 22% fewer shares). Or if the cash is still being held, our investor will need to decide on a reasonable entry point…a vexing conundrum for sure.
However, if the investor just muddled through and held the shares for the duration, 150 shares would be owned. (And a dividend was paid in the duration, but let’s not further complicate this example.)
Below is a graphic representation of what the value of the shares would be on April 16.
Blue line: Held 150 shares thru the duration. Value on April 16: $41,865.
Gray line: Sold 150 shares on March 6, and repurchased 126.26 shares on April 6. Value on April 16: $35,242
Orange line: Sold 150 shares on March 6, and repurchased 117.84 shares on April 14. Value on April 16: $32,890
For the gamblers on wall street, trying to time the market is sport…especially when betting with OPM (other people’s money). For the average investor, trying to time the stock market can be a devastating financial mistake. As Peter Lynch once said, “Far more money has been lost on investors trying to anticipate corrections than lost in the corrections themselves.”
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA.
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Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.