Broker Check

Stock Broker Pitches

The stock market has suffered two major downturns since 2000 (January 2000 to 2003 and November 2007 to March 2009) − a wake-up call for investors. Many people lost up to half of their holdings during those volatile times, and they still have not recovered their losses; especially, factoring inflation.

If you were one of these unfortunate investors, you may have wisely called your broker to sell your holdings and avoid any further losses. However, many brokers may have tried to talk you out of it. Why? It is possible that they may have a “hidden agenda” − they want to keep you as a customer. They know that once customers sell, they often close their accounts for good.

With this in mind, many brokers have been trained with rehearsed pitches. Here is what you may hear when you utter those upsetting words,

“I want to sell!”

Pitch #1: Don’t sell, buy more

“The market is down; your stocks are selling at bargain prices. You shouldn’t even be thinking of selling. Now is the time to buy. In fact, you should “double down” and take advantage of dollar-cost-averaging.”

This might be a smart strategy when you are young and have enough time to recover your losses before you retire. But, when you are close to retirement, time is not on your side. Also, keep in mind the risk you face when using this strategy in a bear market. Every time your stock falls $1 per share, instead of losing just $1, you will lose $2.

Pitch #2: Hold on for the recovery

“The market will inevitably recover, and market recoveries are generally bigger and better than any short-term declines. My recommendation is to keep your mutual funds for the long term.”

This advice sounds logical, but it is flawed. Bear markets can last for many years, as realized by the last two downturns. It usually takes stock prices much longer to recover from their pre-loss levels.

(Question: Many investors lost up to 50% of their portfolio value in the 2007 to 2009 downturn. What percentage will they need to earn just to recover their losses?)

Pitch #3: You can’t afford to take a loss

“Your losses are just “paper losses.” So if you sell now, all you’ll be doing is locking in those losses. You can’t afford to do that.”

What brokers don’t tell you is that there is no fundamental difference between a paper loss and an actual loss. To prove this to yourself; the next time you apply for a mortgage tell your loan officer it’s just a paper loss, and see the reaction you get. Also, the Securities & Exchange Commission (SEC) requires brokers themselves to value the securities that they hold in their own portfolio at the current market price. They must record any losses as real whether they have sold the securities or not.

Pitch #4: You can’t afford to pay the taxes

“If you sell now all you’ll be doing is writing a fat check to Uncle Sam on the profits I made for you – something you can’t afford.”

In reality, the quarterly statement from your broker will show the pre-tax value of your portfolio. So, if you pay taxes on those profits now, or your heirs pay them in the future is mostly a difference of timing. Also, keep in mind Congress does not guarantee future tax rates. Besides, which would you prefer — paying capital gain taxes now, or only deducting $3,000 per year on potential future losses?

Pitch #5: The “Don’t be a fool” argument

“Stocks are currently very cheap and we’re very close to rock bottom. We may even be right at the bottom. If you sell now, in three months you’ll be kicking yourself. Don’t be a fool.”

The truth is brokers do not have the faintest idea when the market will bottom out. They know darn well that stocks are not at the bottom just because they are cheap.

Pitch #6: The market is turning

“Look at this big rally! Your shares are finally starting to come back. After waiting all this time, are you sure you want to run away now, just when things are starting to turn in your favor”?

This pitch is usually invoked when a bear market is experiencing a short term upturn. Intermediate bear market rallies many times give you the best opportunity to sell. They are often stimulated by government efforts to bail out companies or stimulate the economy

We at Haller Financial do not use guesswork to advise our clients when to get in or out of the market. See for yourself what we do. They are just a click away on the website.

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