Buy The Rumor, Sell The News?
Is America waking up from its COVID slumber? The number of people getting vaccinated is increasing daily. Yesterday, Governor Greg Abbott of Texas eliminated the mask mandate, and he's allowing businesses to open up at 100% capacity. Mississippi is doing the same. President Biden anticipates most Americans will receive the vaccine by May. Are we ready for another Roaring Twenties?
The NASDAQ has fallen 6.5% over the past couple of weeks. High-flying stocks like Tesla and Peloton are trading in negative territory for the year; Zoom has dropped 17% since peaking last month at $451 per share. Netflix is down 10% from its all-time high. Are investors selling the working-from-home stocks now that the economy is opening up? It appears so because companies like Carnival, Southwest Airlines, and American Express are flying.
One possible outcome of the reopening economy is a broad sell-off in stocks as we start to live our lives again. We have been staring at screens for the past year with little to do besides ride an indoor bike, binge-watch our favorite shows, and trade stocks. Investing was gamified. Individuals day-traded stocks based on posts on Twitter, Reddit, or WallStreetBets – and the more rocket emojis, the better! As we emerge from our outdoor hibernation, will we still focus our energy on buying heavily shorted stocks with poor balance sheets? I don't think we will.
The market is forward-thinking; individual investors are concerned with the here and now. Markets are a collection of millions of investors, and the collective reasoning is that the reopening trade is already factored into the current valuation. The recent price action could be sending us a signal that the market may fall when we can roam freely.
If there is a correction, should you sell your stocks? If you own a globally diversified basket of funds, the answer is no. You likely own thousands of companies, so no need to worry about being in the right stock at the right time, nor do you need to time the market. However, if you have been feasting on a few speculative names, then selling some shares is recommended.
Your time horizon is another consideration. If your time frame is three to five years or more, use a market correction to add to your equity holdings – buy the dip. If you need your money in one year or less, sell your stocks and put the proceeds in a money market fund.
Another reason to buy or sell stocks during a correction is your ultimate financial goal. For example, if your goal is to retire with $2 million and your account value is $3 million, reduce your stock exposure because you reached your destination. However, if your portfolio is $1 million, you still need to save and invest to reach your target. In this case, buy stocks if they fall.
Last, the NASDAQ is up 85% from the March 2020 low, and several stocks climbed substantially. If you were fortunate to catch a few shooting stars, lock in some profits. It doesn't hurt to take some money off the table.
A financial plan can help you quantify your goals and determine your asset allocation if you're unsure how to proceed. It will guide your investment decisions. During the COVID correction last March, we were stress-testing our client's plans regularly. The financial plans allowed our clients to remain invested through the correction, and as a result, enjoy the gains from the market rebound. We made our decisions based on facts, not rumors.
I have a strict policy. I will not and do not publicize unsubstantiated rumors about anyone -- unless they're very funny. ~ Jimmy Kimmel
March 3, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.
This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don't understand them as well as I should. If you want to trade this asset class, do your homework.