British banking giant has just issued their advice to investors to NOT PANIC but to sell everything anyway. I understand what they are saying, because I am also worried about the increased possibility of a financial crisis. But, unless you are sleepless with worry, this is bad advice!
In behavioral finance, we know there is a behavioral tendency called “anchoring,” whereby a person makes decisions about the future based on decisions made in the past. Investors who sell now will be reluctant to get back into the market later, when the market is again healthy. In other words, the odds are high that they will miss the recovery later.
This is not the same thing as the “buy-and-hold” strategy that is often criticized unfairly. That strategy suggests you buy the stocks you like and hold them forever. Warren Buffet has often said his favorite holding period is forever.
What this is — is extreme “market-timing,” which could also be termed “mission impossible.” (I have the same disdain for extremist investors as I do for extremist politicians, i.e., extreme disdain.) You need perfect knowledge when stock prices bottom, as well as when they peak – good luck on that!
There is an inverse relationship between sleep and cash. If you are losing sleep, then you need more cash in your portfolio. Instead of more normal 5-10% in cash, you might need 20% or 40% or 60% cash in order to stop worrying and to start sleeping well. No, this is not about maximizing profit. It is about maximizing life.
Don’t sell everything . . . but don’t lose sleep either!