Ten Reasons Not to Sell Your Stocks

It's time to get a little perspective on the panic

Americans everywhere are scared -- about the economy, about their investments, now even about their banks and their money market accounts. And who can blame them? There's been a flood of bad news pouring out of Wall Street and Main Street alike.

But there's more than a whiff of hysteria about this now. I can't pretend to have all the answers and I don't have a crystal ball. But I've seen this sort of panic enough times to have a little perspective. I'm certainly not urging you to rush out and put all your money into the stock market. Your investments should be based on your own financial situation first, and the situation in the markets second.

But if you are panicking and getting ready to sell everything and hide under a rock, here are ten reasons why you shouldn't.

1. Oil prices just slumped. It's down below $100 a barrel. Oil's now fallen about a third from its peak earlier this summer. This is a big effective tax cut for everybody, and great news for the economy. It's even better because Americans are also getting much smarter and more careful about how they use it, and that's going to save them money too. It's only a couple of months ago that we were being told that soaring oil was going to kill the economy. That door swings both ways.

2. Mortgage rates have tumbled. Though they've bounced back some in the last couple of days, they still remain around 6%--well below their summer peaks. The panic on Wall Street has brought down rates on long-term government bonds, and that's good news for the economy. Of course, it's tougher to get a mortgage than it used to be. But nonetheless a lot of homeowners can put extra money in their pocket each month by refinancing.

3. A measure on Wall Street known as the "Vix" just went through the roof. In the past, that has tended to signal the bottom of a crash is getting near. The "Vix" is also known as "the Fear Gauge." To oversimplify slightly, it's a measure of how much traders are willing to pay to insure stock prices. The Vix, which was rumbling along as low as 10 when times were good, jumped Wednesday to 36. We last saw these levels at the market lows in 2002 and 2003.

4. Uncle Sam is finally waking up and getting involved in the crisis. Better late than never. If Mr. Bernanke and Mr. Paulson had taken strong, clear action a year ago, maybe some of these blow ups might have been averted, or minimized. But it's good news that they stepped in during the AIG debacle, and it's good news they are letting other firms swap illiquid assets for cash.

5. There's an old Wall Street saying: The time to buy is when there's blood on the streets. How about now? Blood isn't just on the streets -- we're hip deep in the stuff. It's like that scene in The Shining when the elevators open. The market's already fallen 27% from last year's peak, and other markets around the world have fallen even further. By definition, that means shares are a lot cheaper and a lot better value than they were. There are no guarantees, but history has usually been pretty kind to those who invested after the market had plunged this far and just hung on for years. Sure, there may be plenty more bad news to come. But the collapse in share prices has already priced plenty of that in. Investors are, at long last, getting paid something for taking the risk of owning equities.

6. Even one of the most notorious bears is starting to concede some shares are reasonably valued. I'm speaking about fund manager Jeremy Grantham, of Grantham Mayo Van Otterloo & Co. I should add the caveat that Mr. Grantham, who has been predicting financial disaster for several years, remains deeply gloomy overall. Nonetheless he now calculates that shares have fallen so far that if you buy a basket of "high quality" U.S. stocks today and hold them for about seven years, you'll probably end up making about a 50% profit -- after inflation. Stocks that even Jeremy Grantham likes come pretty well recommended even in a financial crisis. His top "high quality" picks are Microsoft, Johnson & Johnson, Pfizer, Wal-Mart, Exxon Mobil, Coca-Cola, PepsiCo, Chevron, UnitedHealth Group, Procter & Gamble, QUALCOMM, Oracle, Merck, Home Depot, and Cisco Systems. (It sort of looks like a typical "Large Cap" fund without the financial stocks.) If you are really nervous, maybe you should just sell your other shares and buy these.

7. Big money managers are bearish. The latest monthly survey by Merrill Lynch (RIP 2008) shows institutional money managers worldwide have pulled back sharply from equities and jacked up their holdings of cash and bonds to the highest levels in years. I mean no disrespect to institutional money managers, but these guys have a remarkable tendency to be what I call a "magnetic south," pointing in exactly the wrong direction. The time to sell was when these guys were heavily bullish and loaded up the gunwales with stocks -- which was the case last year, just before everything fell apart.

8. If you sell everything and move your money into "safe" places like cash or bonds, you will be running right smack into another risk: inflation. The official rate is about 5.4%. Independent economists suggest that for many Americans the real number is actually nearer 9%. So that's how much you are losing in real terms if you keep your money in the mattress. It doesn't make the same headlines as losing 9% on the stock market, but it's a real loss nonetheless. Savings account are a great place to keep ready money, but not for long term investments. They are only paying maybe 3% before tax. As for long-term Treasuries? These so-called "safe" investments are fool's gold. They're yielding barely 4%, again before tax. I wouldn't buy them with counterfeit money.

9. The housing market is about to get two big doses of help. First, the construction of new homes has collapsed. That's bullish news. Think: supply and demand. And second, the federal bailout of distressed homeowners kicks in next month. That's the bailout passed in July. A lot of people think it's unfair that Uncle Sam should provide assistance to imprudent borrowers, and they have a point. Nonetheless the move should give a boost to some of the worst-hit housing markets, by underwriting new loans to those currently in the most trouble.

10. America is finally getting the wake up call it needed. We've been living in a funny-money economy for years. Everyone from college kids to the federal government has been surviving on credit card debt and pretending it could go on forever. It was impossible to get really positive again until that came to an end. It takes a real shock for that to happen. Like this one.

Write to Brett Arends at brett.arends@wsj.com