Should You Sell Stocks When You’re Fearful?

Are you optimistic about the stock market this year? Investor sentiment turned negative last week and the stock market sell-off has begun. Will the stock market decline next week? Nobody knows, but the valuation is high and we had a lot of negative news recently. I’m not optimistic.

• Inflation rose. Core CPI rose to 3.3% year over year. Consumers expect prices to increase and we are reacting accordingly.
• Consumer sentiment plunges over inflation and tariffs concerns.
• US economic growth falters. Companies are cutting back on spending due to uncertainties from recent US government policy schizophrenia. Trump is saying all kinds of stuff and businesses don’t know what’s really coming.
• Trump is alienating all our allies and completely capitulating to Russia. This can’t be good for the US economy.
• Federal austerity measures will cause more problems than any of us expected. Thousands of federal workers are getting forced out by Musk and his tech bros. Federal funding for wide-ranging services is uncertain. Higher education and many nonprofit organizations are already cutting back.

I’m growing more fearful every day. There is too much chaos and uncertainties. Who knows what Trump will say or do next? At this point, I’d be ecstatic with a 5% gain this year. If I’m okay with 5% gains, why not sell all our stocks and put the money in bonds?

I have been an investor for over 30 years and I have never been this fearful. I kept investing through the Dot Com Bubble collapse and the Great Recession. Back then, a 50% market decline didn’t faze me. I was young and I could power my way through a bear market.

However, I’m at a different point in life now. My active income is very low and Mrs. RB40 probably will retire soon. We won’t be able to put much money into the stock market when it crashes. Also, RB40Jr will head off to college in 4 years. The cost of higher education will inflate our annual expenditure for 4-5 years. I’m already starting to stress out about it. I need to be more conservative with our investments.

Timing the market

Investors should know timing the market is a fool’s errand. You have to be right twice – when to sell and when to get back in. The market dropped last week because we are all getting fearful, but is it the right time to sell? The market might recover and go up 20% this year. Getting out too early can be costly.

Getting back into the market is even more difficult once you’re on the sideline. Nobody knows when the market will hit rock bottom. Most people wait too long and they miss out on a lot of gains. Professional money managers can’t get it right even with all their advantages. It is easier to stay invested.

That’s why time in the market beats timing the market. If you’re a long-term investor, just keep buying and you’ll do very well. This was a winning strategy for me over the last 30 years.

Risk tolerance

Instead of timing the market, fearful investors should evaluate their risk tolerance and check their asset allocation. The US stock market returned over 20% annually over the past 2 years. Your asset allocation is probably out of whack if you haven’t checked recently.

We are all getting older. If you’re close to retirement or need to use a large sum of money in the next few years, you should reassess your risk tolerance. When I was 30, I was comfortable with 100% stock. But I’m 51 and wealthier now. I don’t think I can stomach a 50% drop in our net worth. Mrs. RB40 would kill me.

I’ve been reducing our stock exposure, but I feel it’s still too high. Currently, around 70% of our investment is in the stock market. I need to evaluate my risk tolerance again.

Here is an investor questionnaire from Vanguard.

I took the quiz and they suggested 60% stocks. This is more conservative than in the past, but it sounds pretty good to me now. A 10% shift isn’t a huge deal and it’ll help me feel better. I’ll gradually move some money from stocks to bonds in my tax-advantaged accounts. That way, I could avoid paying the capital gain tax.

If you need help figuring out your asset allocation, try Empower. It’s an easy and free way for DIY investors to keep track of their investment and asset allocation. They also have a Retirement Planner and other tools to help you reach your financial goals.  

Are you optimistic about the economy this year? Can you stomach a big stock market crash?

Image credit: Leonardo AI overlord

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.