4 Reasons to hold your stocks through a downturn

Each transaction we make in our investment portfolio adds friction and potentially drags down our returns. During times when the stock market is falling, many investors fall victim to fear and follow the headlines by selling their investments. The classic “buy high, sell low” mentality haunts many investors.

To help you combat those tendencies, this post provides 4 reasons why you should hold your stocks during any downturn in the markets.

Think Long-Term

When the headlines are scary, its tempting to adjust our investment portfolio to match our current emotional sentiment. Unfortunately, this type of emotional investing is common. History has proven with mountains of empirical evidence that our emotions will drag down our investment returns. Contrary to the way we might feel, the best time to buy more investments is when it seems the scariest to do so (the second-best time to invest is now).

Warren Buffett says that “a depressed stock market is likely to present us with significant advantages.”

We all feel at least some fear when we see stock prices falling and doomsday headlines dominating our news-feeds. But remember, we’ll achieve much greater returns from our portfolio when we remain consistent to our investment strategy during tough economic times. Also, being consistent feels much better in the long run. A long-term “buy-and-hold” investing strategy brings greater confidence and peach of mind.

When stock prices are falling, its tempting to “do something”. Often, the best course of action is to stay the course.

Reduce Transactions

Every time we make transactions, we add some discretion and cost to our portfolio. These drag down our returns. Because our decisions are infused with emotion and the trades we make in our investment portfolio include some fees. Whether they’re brokerage commissions or bid-ask spreads. If we reduce the number of trades we make, we will also reduce the drag that both emotional bias and transaction fees have on our portfolio.

Here are 4 reasons to hold your stocks during any market downturn:

• Avoid emotional bias
• Reduce Fees
• Delay Taxes
• Maintain Income

Reason #1 – Avoid Emotional Bias

As mentioned in this post, our emotions have a huge negative influence on our investment decisions. Investing bias is one of the main reasons why investors fail to beat the average. Many of us are shocked to learn that the average index fund investor underperforms their own index fund because they tend to buy when prices are high (and headlines are positive) and sell when prices are low (and headlines are negative).

Our emotions are a scourge on our investment returns. The solution is employing investment strategies that reduce the influence of our emotions. By reducing the number of transactions, and simply holding our stocks when the stock market is down will greatly improve our investing results.

Reason #2 – Reduce Fees

Frequently buying and selling investments is a good way to incur costs. These costs are a drag on our investment returns. By employing a “buy-and-hold” investing strategy, we will also reduce the fees our portfolio incurs. When the stock market is falling, this means we must maintain our strategy by holding our investments. Don’t sell when the market is falling, and we will save additional transaction costs.

Reason #3 – Delay Taxes

Each time we sell an investment, we trigger capital gains taxes. The longer we can delay triggering those taxes, the more time our capital has a chance to compound. For wealthy investors, capital gains taxes might be 25% of our gains. Capital gains taxes represent a huge cost to our returns.

A friend told me recently, that instead of selling an investment to trigger capital gains taxes, he’d rather continue holding the investment and borrow against it instead. Using the money from the loan to make further investments. This might be risky, but his sentiment highlights the fact that interest on a loan is often many times lower than the taxes we may have to pay.

Reason #4 – Maintain Income

When we’re financially wealthy, we can generate enough income from our investments to support our financial goals. For example, a $10 million stock portfolio yielding 3% before taxes is $300,000 of income each year. If we sell our investments when the market is falling in a vain attempt to time the market, we sacrifice lots of steady income.

Instead, when economic times get rough, we should look for ways to use the income from our investments to make purchases while prices are low. When we own income generating investments, it provides us with more flexibility to budget and allocate capital. The income from our portfolios should be used to redeploy into further investments after our other financial goals are met.

Our Family Office

One of the services our family office provides is a steady hand during tough economic times. We help our clients gain perspective by helping them focus on their financial goals over the long-term. We avoid dwelling on the headlines.

Sometimes it helps to have someone to talk to about your financial life. A sounding board. Someone who understands your point of view and can listen carefully and provide thoughtful advice. Many professional advisors, such as investment advisors, accountants, and lawyers, don’t have time for this type of personalized service. We take time to listen to our clients and help them achieve their financial goals.