What if I NEED to Sell Investments During Coronavirus Crisis?

When investors panic and sell after a market suffers a big drop they either lock in a loss, or if they still enjoy a gain in what they sell, they create a taxable event.

What to do? What to do? I’ve been asked by numerous subscribers whether or not they should sell into this COVID-19 market chaos – a question complicated by the fact that each individual has his or her own unique financial circumstances. Watch the video below here.

Buy, Sell or Hold?

I’m one of those buy and hold chaps despite the fact that these big “corrections” can be very unsettling. Still, there’s one thing that never made much sense to me… following the herd. When investors panic and sell after a market suffers a big drop they either lock in a loss, or if they still enjoy a gain in what they sell, they create a taxable event. Later, after the market recovers (and it always does, although the timing is variable), those who did sell are never sure when to buy back in, often missing 40-50% of the recovery… assuming they regain the courage to buy back in.

This is Normal

I’ve experienced several of these major corrections – the 1990s, the early 2000s, and the 2008-09 Great Recession – and each time, I continued to BUY (on a dollar-cost average basis) both during the down- and upside of the cycle. Each time… so far… it has proven to be a beneficial strategy. Because this correction has already taken a sizable chunk out of the market, I suggest that it might not make much sense to sell. I also suspect that the volatility out there is not yet over, but who can be certain about that. Unfortunately, some folks don’t have the option to NOT sell, in which case they do what they have to do. I’m merely suggesting that if you do have the option NOT to sell, then consider staying put. Be ever mindful of the fact that declines become recoveries. It requires patience and fortitude, but this, too, shall pass.

Can't Touch This

As in most major corrections, many folks (including retirees) lose some portion of their livelihood, if only temporarily. Nevertheless, they have compelling reasons to make up the lost income. This is a time when care should be taken about how to compensate for that loss – about what to sell and what to retain. Keep in mind that quality stocks and stock mutual funds have usually recovered very strongly after a big correction – and often that rebound occurs before a full economic recovery. I suppose it’s because, based on history, folks anticipate recoveries before they happen; thus, they happen. In any event, if possible, preserve those assets with the greatest appreciation potential. Many folks who follow my approach of investing choose to automatically reinvest stock or stock fund dividends and capital gains during the good times… and during the bad (see dollar-cost averaging above) if possible. When they can’t, they should try to keep those sources of income – the stocks and/or stock funds – by diverting the dividends and capital gains from automatic reinvestments to replacements for lost income. That way assets are retained to participate in a future market recovery. To repeat a newly coined COVID-19 era phrase: Your portfolio is like your face: Don’t touch it!

Think Counterintuitive

If you must sell assets, first review bond funds you might own, or if you own individual bonds, consider selling those closest to maturity. As to stocks, isolate those for sale that have weathered the storm best. It might seem counterintuitive, but stocks that depreciated the least on the downside may offer the least potential during a market recovery. Conversely, those assets suffering the most might have the greatest upside potential, making them more worthy candidates to hold. And if possible, avoid selling everything at once. Consider raising just enough money to cover the next month’s expenses. Dollar-cost averaging often works to your advantage whether buying or selling.

Never Too Late

Unfortunately, there’s no magic formula for surviving a big market correction. Oftentimes, doing nothing makes the most sense, but it’s a path many investors are simply unable to follow. They must raise cash to fill the gaps of lost income now. And it often makes sense to consider selling assets with the least future appreciation potential (i.e., bonds or other fixed income assets), including those assets that suffered the least on the downside, but which are likely to appreciate the least on the upside. To beat a dead horse, a good financial plan… starting with a “rainy day” fund… is the best antidote to navigating a major correction. For some, perhaps it’s a bit too late to eliminate the pain of this one, but it’s never too late to prepare for the next one. And it will come.