Old people and their stock certificates are great because the physical acts required to cash a stock certificate add some friction to the buy-and-sale process that might make an investor more likely to hold onto their stocks rather than sell them as a knee-jerk reaction.
I was reading Vanguard’s recent Whitepaper on how its investors are buying and selling stocks online more than ever before. In particular, I noted the data point that 41% of Vanguard clients had purchased some security that was then sold online within a year of the ownership position in 2018. In comparison, only 8% of investors in 1960 sold a security that they had purchased during the same year. It is not a perfect comparison since the high costs of purchasing stock in 1960 severely limited the pool of potential stock buyers, but the point remains that being able to sell stocks easily online can make it easy to undo a lot of hard work in a moment of weakness.
In addition, almost 82% of investors under the age of 30 reported selling a stock online that they had owned for less than a year.
These are the types of bad habits that an investor can have during a bull market without paying much of a consequence. When everything is mostly moving up, you can act foolishly but receive the results of a wise man for a little while.
I think people are forgetting what happens during bear markets. Since 1960, there have been five instances when stock prices have fallen by 30% or greater. When someone has a $100,000 portfolio that quickly becomes $70,000, he needs to avoid cashing out his stocks. All the gains of 2012 through 2019 can be wiped out with nothing to show for it if you don’t have the gumption to refrain from selling during hard times.
In my own life, I have not downloaded any investment-related apps. I do not need to be processing stock market news during the work day. Maybe that means an occasional opportunity gets missed, but I would prefer avoiding knee-jerk reactions.
I can do just fine identifying a dozen or two stocks of interest, waiting for one of them to hit the right price, using the weekend to think about the proposition broadly, and then make the decision and allow the asset to compound indefinitely. There are no varying emotions because the process is kept simple.
In 2007, approximately 61% of Americans contributed to their 401(k). In 2009, during the height of the recession, only 34% of Americans added to their 401(k). Now, in 2019, we are back up to 59%. In the aggregate, we are not good at pulling back when markets are frothy and diving in when valuations are dirt cheap.
While online stock trading existed in 2009, the next recession will be the first time investors can receive app alerts showing you red losses in the thousands or tens of thousands of dollars on a bad day. You can literally be in the bathroom, pull up your app, and sell your ownership position at a short-term low. The opportunity for mischief is too darn easy.
If you have sold more than three stocks in the past year, and it wasn’t for a legitimate purpose withdrawal purpose, now is a great time for a personal assessment. If you own $1,000,000 in stocks, you need to visualize that figure at $680,000 because that day will come again. If you can’t handle that, you need to start building up your cash position or direct future contributions to U.S. bonds until you reach a point where you can handle it.
It should go without saying, but you should only own assets that you will not sell when they hit a low. Vanguard’s data points are showing that people are using their app and mobile logins to exchange stocks freely as though they are trading sardines–mere blips on a screen that go up and down rather than an ownership position in an actual business.
Most humans are not well-prepared for the capability to press a few buttons on their phone in the heat of the moment. If you’ve ever done any stupid selling during this bull market, you should come up with a plan to restrict or limit your market access for when the quick declines come. Your relationship with technology affects the logistics of building wealth, and should be taken seriously.
