Friday, January 15, 2016

Chuck Donalies: The Frugal Planner's Weekly Dispatch, Volume 2, Issue 3

From: Chuck Donalies, CFP®  On Behalf Of Chuck Donalies, CFP®
Sent: Friday, January 15, 2016 10:43 AM
Subject: The Frugal Planner's Weekly Dispatch, Volume 2, Issue 3

The Frugal Planner's Weekly Dispatch
Personal Finance, News, Ideas, and Things I Find Interesting

Volume 2, Issue 3
January 15, 2016

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Sell Everything? Hold On.

In case you missed it, The Royal Bank of Scotland (RBS) released a report this week warning of a 10-20% decline in the stock market during 2016. Their recommendation: Sell all equities in preparation for the projected decline. After the report was picked up by the news I had several clients ask me whether or not they should sell their equities. Here's how I responded:

I believe it's irresponsible for RBS to suggest selling all equities in preparation of a potential 10-20% drop in domestic and foreign markets. No one - not even Warren Buffett - can consistently predict what's going to happen in the financial markets. There are simply too many variables to consider. And don't forget investors are irrational!

Investors have four options:
  1. Stay the Course: This may not feel good and may not be appropriate for you depending on your age, goals, and risk tolerance. The two primary reasons to stay the course are that (1) you created a plan with your specific goals in mind, and therefore you should stick with the plan, and (2) it's impossible to time the market.
  2. Sell All Equities: This option is on the other end of the spectrum. If you do this you're essentially following the recommendations from RBS. You'll significantly reduce your risk but you'll also miss out on any gains if the market recovers.
  3. Reduce Your Exposure to Equities: Consider this option a happy medium. If you cannot bear the thought of losing 10-20% (or more) of your portfolio or your financial plan calls for capital preservation, then you could consider selling a portion of your equities (5, 10, or even 20%) in favor of cash or low-risk investments. There's no "right" percentage to sell. Again, the problem of market timing rears its ugly head. Selling is easy; determining the best time to get back into the market is difficult.
  4. Sell Your Stocks and Invest in a Birkin Bag: Okay, I'm not seriously recommending this option despite a recent study suggesting the pricey bag from Hermes is a "historically safer investment than a stock market". There's a waiting list to buy one of these bags and they typically start at $10,000. Ouch.
Again, there's no one-size-fits-all answer to the question of whether or not to sell your equities. Financial markets have performed exceedingly well during the past six years. Would it be great if returns were always positive? Sure, but thats not a realistic expectation. We should expect, and even welcome, declines because they present buying opportunities.

Still concerned? Have additional questions?? Feel free to contact me.

I think I'm in the wrong business.

Also, don't get any ideas, Heidi Kotzian.

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