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There is a ‘right thing’ to do when the market tanks


I came across a statistic so surprising it was hard to believe: During the recent market downturn, according to Fidelity Investments, approximately 15% of investors sold all of their stock holdings. And among investors age 65 and older, nearly a third sold all their stock market investments. It was a discouraging figure, meaning that large numbers of people had picked exactly the wrong time to abandon their investments.

Fortunately, the figures were corrected a few days later. The actual numbers turned out to be far smaller. That’s good news since the stock market recovery, like the downturn itself, was the fastest on record.

Still, some people did give up on the market while it was down. On The Wall Street Journal’s website, where these figures were reported, the article sparked a furious debate, with some readers still vehement that selling stocks was the right thing to do.

One wrote that, “I simply don’t understand the logic why almost all financial advisors say to ride this out.” Another put it in more colorful terms: “The marketeers say to stay the course. Do not ask a butcher about the merits of a vegetarian diet….”

Many took the opposite view, arguing that it would be a mistake to sell out of stocks. One reader wrote, “Have fun in 20 years when inflation has destroyed the purchasing power of your ‘safe’ cash and CDs. I believe in the U.S. and in the miracle of our economy…. I’m all stocks and always will be!”

Others didn’t necessarily weigh in on either side. Instead, they just offered their own personal prescriptions: “10% cash, 45% six year or less duration bond fund and 45% in an

fund is all you need.”

In all, there were more than 300 reader comments on the article. What struck me, though, is that people were largely talking past each other. It sounded more like a political debate than a financial one.

But unlike a political debate, there is a right answer to this question. The numbers, as you might guess, tell us the best strategy is to stay the course. According to a review by Vanguard Group, no fewer than nine different studies going back to the 1960s have confirmed this.

But I can understand why some people still sell during market downturns. Every market downturn is different and scary in its own way—and this one was no exception.

Canada’s Financial Post captured it well. In a mid-March article titled “This Time Is Different,” one economist explained why he saw this crisis as even worse than 2008, which was itself terrible: “In the [2008] financial crisis, air travel didn’t come to a halt, borders weren’t being closed, we weren’t talking about quarantines and self-isolation…. [P]eople weren’t scared to leave their homes…. The reality is the [2008] financial crisis did not come with a mortality rate.”

In my conversations with investors over the…


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