2022 has been a real rollercoaster in the public markets, and it's been challenging to know what to do as an investor. After the longest bull market in history, we’ve seen stocks come under increasing fire as the economic impact of the pandemic plays out, and we see global inflation at levels as we’ve never seen before.
As is typical of periods like this, investors must decide how they will react to the market conditions – especially if you think that this is the beginning of a market crash. If you were certain that is the case, the rational thing to do would be to sell all your stocks now, wait for the crash, and then buy in at a much cheaper price. Simple right? Not quite.
We don’t have the certainty that would allow that sort of strategy, so we need to carefully consider whether it is a good idea to sell now and hope to buy back cheaper later on. In this article, we’ll look at exactly that and explore whether this could work for you as an investor.
Timing the Market
If you look at traditional investing advice, experts will typically advise against trying to time the market. For most investors, they don’t have inside information about specific companies, and trying to guess when the market will shift has been a very risky proposition. In addition, humans are emotional creatures, and so that often plays a role in this as well. Panic can set in during these moments, which creates a spiral of prices – which then becomes a self-fulfilling prophecy.
To try to guard against this, the standard advice has been to put aside the idea that you can time the market, and simply employ dollar cost averaging to sustainably invest regardless of what stage of the market cycle you are in. Under this logic, you’d rather hold your stocks through this down period because you can’t be sure whether a crash is imminent.
However, this is obviously the conservative way to go – and it's not the only way to look at the situation.
Opportunism and Market Cycles
While the above advice is sound, it also eliminates much of the risk on which returns can be made. If you have a more aggressive risk appetite, and you want to make outsized returns, then selling your stocks and waiting for a correction could be a lucrative strategy. Thus, it's not something that you should ignore – especially if you are in a financial position to take some risk.
If you look at the bull and bear market cycles over decades, you’ll see a natural oscillation between good times and bad times as the economy swings from side to side. It appears that things consistently tend to return to the mean over the long term. Taking this one step further shows that we might actually expect a crash after the tremendous growth we’ve seen in the past decade. Some might say that we’re definitely due a correction.
This can be backed up by looking at P/E ratios, which are at all-time highs, showing just how inflated global markets have become. If you believe this is the case and can afford to take some risk – then this might just be the biggest opportunity we’ve had in years to supercharge your returns. Nothing is for certain, of course, but these are the moments where opportunists can seize the day and make outsized returns.
Transaction Costs and Taxes
One last consideration that is important here is to consider the transaction costs associated with selling your stocks and buying back in. This is something that many people overlook, and it should be a significant factor in your thought process. Whenever you sell or buy stocks, you will incur some form of brokerage fees that bite into your potential returns. This is why a buy-and-hold strategy is so effective because it minimises these and allows the full scale of the growth to play out unhindered.
Additionally, the tax implications of your sale should also be considered. Depending on your jurisdiction and how long you’ve held the stocks for, you’ll need to pay some form of capital gains tax. This is another cost that should play a key role in your calculations when determining whether it’s a good idea to sell your stocks and wait for a crash.
Run your calculations carefully and consider whether the expected returns are worth the risk – because that will determine what the right decision is for you.
So, What Should You Do?
As unsatisfying as this might be, the right decision is going to differ for every person. Your individual circumstances, risk tolerance, financial position, and view on the world will dictate what the right move for you is. But if you can take the points above into consideration and understand the merits behind each strategy – you can make the best decision for you.
Opportunities abound, but ensure that you understand the associated risk and make decisions accordingly. That’s how you build long-term wealth.
The information in this article is well-researched and factual. Still, it contains opinions also, and IT IS NOT FINANCIAL ADVICE and should not be interpreted as such, do not make any financial decisions based on the information in this article; we are not financial advisors. We are journalists. You should always consult with a professional before making any investment decisions.