Corona Investing: What Happened To Investors That Sold Stocks During The Financial Crisis?

It has often been said that seeing your net worth fall by 30-60% on several instances over the course of an investing lifetime and that is the price that must be paid in order to receive the benefit of long-term wealth compounding at 8-12% (rather than the 1-2% that you will otherwise find in U.S. bonds and high-yield savings accounts). 

Another cost that is rarely discussed is this: What happens if you sell your stocks amid a crisis and buy in several at a later point? It is an imprecise inquiry because the mileage can vary with each possible date–i.e. If you sell on April 2nd, you’ll get different results than someone selling on April 3rd, and if you buy on May 4th, you’ll get different results than someone who buys stocks on May 5th.

With the understanding that there is the possibility of large variance, I wanted to examine what happened to investors that sold in October 2008 (i.e. the point during the financial crisis when stocks took their first jolt downward) and then re-entered the market in the summer of 2009.

Selling in October 2008 would have locked in losses when the S&P 500 was at 840. If they got back in the following summer, stocks would have been at 1,042. At the time of this writing, the S&P 500 is at 2,789. For those who were fully invested in October 2008, and held on through the present day, they would have compounded at a rate of 13.53%. For those who sold their stocks and got back in, they would have obtained 10.89% returns over the same time frame. 

For someone with a net worth of $100,000 in October 2008, they would now have $403,847 in total wealth. For those who sold and then got back in, and managed to stay fully invested through the present, they would have ended up with $311,757. Someone who stays the course with a basket of stocks got to experience an additional 22.83% in total net worth eleven years later but not playing the get-in-get-out game. 

If someone really wanted to time it poorly, and sell their stocks at the low point of March 2009 before getting back in during the summer of 2009, the compounding rate would have dropped to 7.87% for a current net worth of $230,000 under our assumptions. That is 43% less total wealth than someone who managed to hold on through the financial crisis from start to finish.

I have no problem turning this website into an extended Public Service Announcement against selling stocks amid the coronavirus. That is the absolute worst thing that you can do, with the penalty being that your net worth a decade from now could easily be 22% to 42% lower than it would be compared to the investors that ride through it. 

There is a reason why I focus almost exclusively on blue-chip stocks that make up most of the Dow Jones or the S&P 500 in my writings. They are the post-WWII multinationals that have profits rolling in across dozens of currencies in 100+ countries around the world, and they are the companies that have managed to survive generation after generation. Even if they are particularly affected by the shutdown associated with the coronavirus, they often have cash balances or at least credit lines that provide the opportunity to survive a 24-36 month period of depressed or wiped-out demand. 

I have written 85 articles about Coca-Cola stock in my life. It is because the company sells an essential product (beverages) with extreme competitive advantages (strong intellectual property and distribution capabilities) with a strong balance sheet ($18 billion in cash) and a dividend record with very few peers (has never missed a dividend payment since its IPO in 1919, and has grown the dividend every year since 1963). Even during a global shutdown, it is only seeing annual profits dip from $9 billion to possibly the $7-$8 billion range. “Extreme global hardship” to Coca-Cola means only $650 million gets shipped to Atlanta Headquarters as profit each month instead of $750 million. Your job is to find one or two dozen companies sharing those characteristics over the course of a lifetime and add them to your investment portfolio holdings. 

Warren Buffett once remarked that he freely gives so much investment advice because, when push comes to shove, people become their own worst enemies and can’t get out of their own way. I suspect that, with the recent 20%+ rise in the market, that it is easier for investors to hold or even buy securities. But the next time the stock market drops 10% quickly, it’ll be back to the mid-March type of attitude for far too many. 

What needs to be understood as that selling stocks with the purpose of finding a safe harbor from future losses often results in the permanent destruction of someone’s cumulative net worth. Literally, someone who bought the S&P 500 in the summer of 2007, and held through today, will have 42% more money than someone who sold in March and got back in later that summer. They both had to put in the time of waiting eleven years for results, but one has much more to show for the same exact behavior than the other because of the single decision to ride through the storm. 

Psychologically, people often talk about attending college and obtaining a degree as the price to be paid for longer-term earnings power over the course of a career. By way of analogy, seeing your stocks fall X% during a bear-market decline is the “tuition” you pay for a “degree” that will result in  22% to 42% more wealth over the course of the next decade than your identical counterpart that chooses not to attend “The University of Buy and Hold.” 

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