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Read Before Selling

John Lim

LIKE A TIRESOME rerun of Friday the 13th, COVID-19 has returned in its newest form, the Omicron variant. Last Friday, financial markets were shaken by the news, especially the potential for greater transmissibility and the fear that current vaccines will prove impotent against the new COVID variant. Yesterday saw a partial market rebound. Still, traders are betting that share prices will remain volatile.

Much is unknown at this point, but many investors have taken a sell-now-and-ask-questions-later approach. This is understandable. The early 2020 market meltdown is still fresh in people’s minds. Tempted to sell stocks? Here are seven reasons to stay the course:

1. Markets are rarely fazed by old news. When COVID struck in early 2020, the world was in the dark about the implications of the new virus. Few things unnerve investors more than uncertainty, so it was hardly surprising they sold en masse.

While the new variant is clearly concerning, it’s not a totally new ballgame. We’ve been here before and survived. In other words, the likelihood that investors will panic to the same degree seems low.

2. We have proven technology to fight Omicron and future variants. Human ingenuity is remarkable. That was clearly on display last year when biotech firms and big pharma developed hugely successful vaccines in record time. It may take a while to develop a vaccine for this newest variant—assuming that current vaccines are ineffective—but we have the capability.

3. An economic lockdown is now far less likely. Even in a worst-case scenario in which Omicron evades current vaccines and wreaks havoc on the health care system, it seems unlikely that we’ll revisit the original playbook of stay-at-home orders and shuttering of the global economy. I doubt that people, and the politicians who represent them, will tolerate such extreme measures. Result? The economic impact may not be nearly as severe this time around.

4. Bear markets are the price investors must pay for the outsized returns that stocks offer. Assuming share prices fall further—which is far from certain—such downturns are an inextricable part of the generous long-run returns that stocks have historically provided. Stocks offer a return premium above that of riskless assets such as Treasury bills, but one that entails significant risk, as reflected in price volatility. In short, there’s no free lunch.

5. There aren’t great alternatives to owning stocks. Suppose you sell out of stocks. Now what? Holding cash pretty much guarantees you a loss after factoring in inflation, which has been running at a 6% clip this year. You can tread water by buying Series I savings bonds, but the sums you can invest in them are limited.

Ten-year Treasurys offer a measly 1.5%, again guaranteeing you a loss after inflation, while 30-year Treasurys—at almost 1.9%—aren’t much better. Even junk bonds, which are far riskier, offer payouts of just 4.7%.

6. Lower stock prices are a blessing in disguise. Unless you’re close to retirement, a drop in share prices has a huge silver lining. In fact, if you’re decades from retirement, you should get down on your knees right now and pray for a bear market.

Remember that when you buy stocks, you’re buying into real businesses with cash flows and often dividend payments. Wouldn’t you rather pay less for those same dollars?

Some of the greatest investments you’ll ever make will occur during severe bear markets, only you won’t know it at the time. As Warren Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

7. The Fed has your back. I say this only partly in jest. One of the greatest maxims on Wall Street is, “Don’t fight the Fed.” Why? The Federal Reserve has a potent money-printing machine. If the Fed has the will, it can use this machine to drive up asset prices.

Witness the violent market reversal in March 2020. Last year’s stock market bottom almost perfectly coincided with the Fed’s announcement of highly aggressive monetary measures, including a massive round of quantitative easing. Among other things, the Fed promised back then to purchase at least $700 billion in Treasurys and mortgage-backed securities in the coming months.

Given the dovishness of the current Fed, count on additional monetary stimulus should the stock market take a tumble. The “Powell Put,” named after Fed Chair Jerome Powell, is very much alive. Do I think such behavior is healthy for markets? No way. But that’s the world investors live in.

John Lim is a physician and author of “How to Raise Your Child’s Financial IQ,” which is available as both a free PDF and a Kindle edition. Follow John on Twitter @JohnTLim and check out his earlier articles.

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