Is It Time To Be Selling Stocks?

With stock exchanges around the World reaching new highs every week many investors are growing increasingly nervous and are wondering whether they should be selling some shares and pocketing profits.

Well, let’s look at what families in general, have been doing.

It is now five years after U.S. Bank Lehman Brothers collapsed. This triggered the Global Financial Crisis and shattered investor confidence worldwide. To this day most families are not invested in the stock market.

The Americans Associated Press (source: CNBC) has done some fascinating research of households in the worlds ten biggest economies. Families are still scared and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer interest rates that provide a negative return after taxes and inflation.

Ian Bright, senior economist at ING, a global bank based in Amsterdam summarises the situation excellently : “It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back. The attitude toward risk is permanently reset”.
A flight to safety on such a global scale is unprecedented since the end of World War 11.

The implications of this are massive. While families quietly rebuild their balance sheets the world economy, in spite of near zero interest rates, is struggling to reach escape velocity.

Since the collapse of Lehman families just want safety. Sadly, this is not the way to invest.

Associated Press went further with their analysis. They studied household behaviour during the five years before the Great Recession in December 2007 and the five years that followed, through the end of 2012. The focus was on the world’s 10 biggest economies – the United States, China, Japan, Germany, France, the United Kingdom, Brazil, Russia, Italy and India – which have half the world’s population and 65 percent of global gross domestic product.

The key findings were :

RETREAT FROM STOCKS – investors dumped stocks, even as prices rocketed from crisis lows in early 2009. Investors pulled $1.1 trillion from stock mutual funds in the five years after the crisis.

SHUNNING DEBT – looking for safety households added $3.3 trillion, or 15 percent, to their cash holdings in the five years after the crash. The growth in cash is the more remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts.

SPENDING SLUMP – To cut debt and save more, people have reined in their spending. Adjusting for inflation, global consumer spending rose 1.6 percent a year during the five years after the crisis, according to Pricewaterhouse Coopers, an accounting and consulting firm. That was about half the growth rate before the crisis and only slightly more than the annual growth in population during those years.

Consumer spending is critically important because it accounts for more than 60 percent of GDP.

So again, tragically history repeats itself. Against a backdrop of stock exchanges that have more than doubled most private investors have been pulling money out of shares.

So where does this leave individuals who are already invested in stocks or who have cash to invest?

I believe the time to invest is when you have cash! There are always companies doing well and companies doing badly. You just have to be very selective.

Nowhere does history indulge in repetition so often or so uniformly as in the stock market. Sadly when every family and every Tom, Dick and Harry are speculating wildly in stocks, that is when the professional money manager will get out!