Investors, Don't Let Current Events Spook You

My husband, Sean, is a methodical guy who carefully weighs all possibilities before acting. So when he broached the idea of selling all of his stocks because of his concerns about both market valuations and geopolitical uncertainties, ranging from North Korean bluster to neo-Nazis marching in Virginia, I thought it might be time to take a step back and discuss when—if ever—it’s advisable to sell everything.

First, let me state the obvious: Nuclear war would not be good for your stock holdings. That said, if such a conflagration were to occur, we’d all probably have better things to do than worry about our portfolios.

Armageddon aside, a couple of things could spur you to dump all of your stocks. If you have enough money to live on for the rest of your life—even if your investments don’t come close to keeping pace with inflation—and stocks make you nervous, sell. After all, the goal of accumulating wealth is to make you calm and comfortable. If you’ve aced comfortable, and holding stocks is interfering with the calm, get out.

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In addition, if you have some looming financial obligation that could require every bit of your savings, you should not be in stocks. Because the stock market is notoriously volatile and unpredictable over the short term, money that you will need in the next year or two should be in safe vehicles, such as bank accounts and money market funds.

Sell everything? What about getting out temporarily and reentering the market when things look better? If market timing were so simple, we’d all be billionaires. But make a mistake and your results suffer big-time. For example, if 10 years ago you had invested in a low-cost fund that mimicked Standard & Poor’s 500-stock index, you would have earned 7.7% annualized (despite having suffered through the devastating 2007–09 bear market). But if you had missed the stock market’s 10 best days, you would have barely broken even, according to Morningstar.

So what do you do when you’re spooked about current events? You review your investment goals and make sure that your portfolio is properly structured to achieve them. For instance, you should have enough cash—typically six to 12 months’ worth of living expenses—to handle emergencies and address near-term financial goals.

Bonds and CDs are good for funding medium-term goals, such as buying a house or car. Real estate—both the home you live in and real estate investment trusts, which own different kinds of commercial properties—are good inflation hedges. After all, the rents that REITs collect from tenants are likely to rise with inflation.

The rest of your money—the savings aimed at funding goals in the distant future—should be heavily invested in U.S. and foreign stocks. Over the past 90 years, according to Morningstar’s Ibbotson unit, shares of large U.S. companies have earned average annual returns of roughly 10%, handily beating the rate of inflation and boosting investors’ long-term buying power.

Adverse news—whether it’s the threat of war or negative economic developments (which, in truth, have been in short supply lately)—will always buffet the stock market. It’s worth noting, though, that over the 90-year period tracked by Ibbotson, we have endured a world war, the Korean War, Vietnam, Watergate, 9/11, the Great Depression, the Great Recession and numerous milder economic downturns. In other words, although it may feel as if you’re facing the storm of the century every time you turn on the news, the world and the financial markets have seen worse and survived.

It’s normal to be worried in tumultuous times. But worries should make you check your course, not change it.