By Christopher J. La Porta, Director Fenimore Private Client Group
Q: With the stock market’s recent volatility, should I sell when prices drop and get back into the market when things are better?
A: Similar to the value of my house, I have a long-term view of my investments and won’t sell simply because prices decline.
To put it in perspective, imagine someone ringing your doorbell every minute from 9:30 a.m. until 4:00 p.m., Monday through Friday, to tell you a price they would pay for your house even though it was not for sale. Would you sell? Would you sell if each time you opened the door they offered you less and less? Obviously not – that would be irrational because you know the true value of your house. The same applies to stocks of high-quality companies – they have value despite their daily price movements.
However, investors often perceive “value” in the stock market as “price” and forget the economic worth of the business attached to the stock. During sell-offs markets can drop because of uncontrollable factors that are not purely economic in nature – despite sound company-level fundamentals. Many perceive this day-to-day volatility as “risk,” but you certainly wouldn’t consider daily price movements as risk to your home’s value in the long run. Perhaps the long-term view real estate investors most often take could be a good lesson for stock investors.
Similar to your home, companies have actual economic value despite their stock price on any given day. They are not just pieces of paper or a blip on the computer screen. I look at the marketplace not as a stock market, but as a market of stocks. I favor high-quality U.S. businesses with strong cash flows, little if any debt, appropriate global exposure, and excellent leadership. Ultimately, a stock’s performance depends upon the underlying company’s ability to grow economically – not how the market prices its stock on a daily basis.
However, investors often let their emotions get in the way of rational decision making. They become fearful and sell when they should buy. The typical result is that they miss the market upswings and their gains are much less than what they would have been if they had just stayed the course. Trying to time the market just does not work consistently enough to build wealth over the long term.
Additionally, there is an overwhelming amount of research that shows that long-term investing ─ even through a stock market downturn ─ yields better results over the years than trying to time a decline, remove capital, and return when “things are better.” In fact, studies of recent 20-year periods demonstrate that missing just 10 of the best days in the stock market over two decades can dramatically affect an investor’s rate of return.
Solid, fundamental business characteristics do not make a stock impervious to daily price movements, and all asset classes fluctuate including bonds and real estate. However, just as your home’s value can grow over time, stocks of high-quality, financially sound companies also possess long-term growth potential. I believe that stocks are essential in order to outpace inflation and generate real wealth over the long haul.
If you can focus on your financial goals and not short-term stock market fluctuations, you can be successful. So as stock market volatility causes people to be fearful, I remain confident being invested in corporations that I feel are best suited to grow my assets and defend against true risk – the permanent loss of capital.