Stock market volatility has hogged the limelight throughout the year. We saw #WallStreetBets on Reddit and extensive media coverage of Wall Street hedge funds and activist investors in the first half — and the Dow Jones Industrial Average’s
worst trading day of the year over Thanksgiving weekend, driven by fears over the new omicron variant of the coronavirus.
With so much volatility this year, on top of what occurred last year, it can be tough for investors to know the answer to the question, “Which side of a trade should I be on?”
As financial advisers to early employees at various now-public “unicorn” companies, we see how selling a concentrated stock holding is often one of the most difficult questions for clients to tackle. Money matters are always a deeply emotional issue — and nowadays investors are especially vulnerable to anxiety, which can cause them to panic and make poor investment decisions.
“‘What’s worse — missing out on the high from gains on the upside or feeling the pain of losing money on the downside?’”
When we and our colleagues begin to determine a client’s risk profile, we frequently ask, “What’s worse — missing out on the high from gains on the upside or feeling the pain of losing money on the downside?” This is an important question because past market cycles remind us that if investors are patient, the stock market will likely recover.
The same can’t be said of individual stocks. Take for example JDS Uniphase, Nokia
Research In Motion , GoPro
and two companies that were among the largest by market cap in their respective markets — Nortel and Exxon Mobil
Many other companies were once leaders, only to fall from grace and never reclaim their crowns.
Of course, there’s no definitive crystal ball for predicting market volatility or investment performance. In periods of extreme market volatility, like now, even the most promising stocks can suffer. But investors can increase their chances of navigating ever-evolving market conditions by using three primary factors to forecast individual stock performance:
The viability of the specific company
How long investors are willing to wait
It goes without saying that no two stocks are the same. Even companies in the same industry have different growth prospects based on their respective management teams, products, supply chains, and media profiles, among a variety of other considerations.
Some companies will take longer to experience a share-price recovery than others. But again, if the company has viable long-term prospects, market sentiment is strong, and/or investors are willing to be patient, there’s a chance of being rewarded down the line.
The following three-step strategy can help investors emotionally withstand the stock market’s inherent ups and downs and ensure they make objective, rational trading decisions over the long term:
1. Identify goals that make stock sales rewarding: The most rewarding sales often satisfy an emotionally fulfilling financial goal. Investors should spell out these goals and speak with their financial adviser about how selling a large stock position can help achieve them. For example, one couple sold stock to fund the down payment on their first home and have never regretted the decision, as they were able to secure a home for their family. Identifying important personal goals — like paying off student debt or buying a home — and working with a trusted adviser to implement a disciplined stock selling strategy can help you avoid poor decisions driven by market anxiety and panic.
2. Create a selling strategy that capitalizes on market trends: Whether you have accumulated a concentrated holding through equity-based compensation or by personally investing, timing the market is next to impossible. In the long run, it will be tough to be 100% correct. You can sell shares with confidence by developing a stock-selling strategy that achieves a better price by trading more shares at higher-limit prices.
3. Incorporate philanthropy into your selling strategy: If giving back to your community or a particular cause is important to you, transferring a portion of your shares to a donor-advised fund (DAF), or directly to a specific charity, can take the stress out of selling, avoid capital gains taxes, and benefit your selected charitable organization. Publicly traded stock contributed to a DAF or specific charity can also provide a tax deduction for those who itemize their tax return. A DAF can be thought of as a charitable-giving savings account where your contributions can be invested in a diversified portfolio and grow tax-free while you decide on what individual charities to support.
Whatever selling plan you implement, it is generally advised to only shift course in the event of a significant material change, such as a market downturn. Try not to check stock prices obsessively — this bad habit only exacerbates anxiety over short-term volatility and goads you into making decisions you will likely regret.
Deciding when it is the right time to sell a stock position — even with strong performers like Amazon.com
which have fared well during the pandemic — is never clear-cut. Market sentiment, a company’s long-term viability and growth prospects, and an investor’s level of patience all influence a stock’s performance. It can sometimes take a decade or longer for a stock to begin trading at prices that investors and analysts never imagined were possible.
Ultimately, investors should be patient, and implement disciplined selling plans informed by their financial goals as well as market trends, in order to stay invested long enough to sell at an opportune time.
Fritz Glasser, CIMA® and Meghan Railey CFP® are the founders and CEO and CFO, respectively, of Optas Capital.