Before we begin, I want to welcome you to October, literally the best month of the year. It’s part warm, part crisp, you get to wear fleeces again and eat the most underrated candy bar in the World, 100 Grand, on October 31st. It’s my favorite month of the year with the best holiday of the year (yea I said it).
In my World there are Bulls and Bears, people who think the market is going up and people who think the market is going down. There are even “perma” versions of these names, people who just stick to one viewpoint. I have been, at times, labeled a “perma bull”.
Ok, sure, if that’s what people want to call me because I believe investors should focus on the long term so they can benefit from the growth of our nation and stock market fine, I’ll accept it, call me a “perma bull”. But there are times I think people should sell stocks, where it makes sense to lighten up on risk. This isn’t a definitive list but I think the one’s I mention here make the most sense.
First, let’s ground ourselves in how I think broadly about investing. I believe people should have short term money, in less risky assets, to meet short term liabilities (rent, insurance, food, etc) and long term money, invested in a diversified portfolio, to benefit from long term growth in stocks.
One last thing, this blog post isn’t meant for traders, it’s meant for investors. So…when should people sell assets out of that long-term diversified portfolio?
- When you don’t understand the investment strategy. You don’t understand how the overall investment strategy aligns with your goals, whether it’s the asset allocation or the overall level of risk. In that case I think it can make sense to hit the sell button and start over.
- You’ve reached your goal! Congratulations, you’ve saved enough for that home, or college tuition, or other life goal and you want to pay for it. One of the best feelings in the World.
- You can’t sleep at night. This one is tricky because all investing requires a level of risk. You could sleep at night in all cash but that brings up a whole other possibility, you run out of money as you spend it down. Find the portfolio that helps you reach your goal (accepting that you can’t completely avoid risk) but also allows you to sleep at night when the World inevitably breaks again. This requires tweaking for sure, but that’s where someone like an advisor can help
- It’s time to rebalance. Rebalancing can be a powerful tool to remove emotion from the investing process. Once you decide on a time frame (quarterly, semiannually, annually) stick to it even when it feels wrong. Take a 60/40 portfolio for example, if you chose quarterly rebalancing you would’ve sold some portion of stocks at the end of 2019 after a 31% gain in the broader market (S&P500). If your equity component gets above its target (due to the market going up) rebalancing sells stocks to get you back to your chosen plan.
- It makes sense to replenish that short-term money I spoke about. It is critical for you to have a “safe bucket” to meet your funding needs. You need enough in here to get you through the inevitable and, as history has shown, temporary periods where your growth assets are declining. When it’s advantageous for you to replenish those funds, say in a market rally, that can be a smart time to sell. We all have short term cash needs, be shrewd about when you refill this bucket so you won’t have to (or be forced to) when emotions are running high and the market has gone haywire.
- The investment doesn’t align with who you are and what you believe in. You might be invested in something that, over time, has shown that its values don’t align with your own. It could be a management issue or a public event or maybe you’ve changed your views on a subject. You could consider selling it and using your capital to support something else.
Notice what I didn’t have in here as a “reason to sell”: Someone telling you they are worried about the market, or a billionaire on CNBC acting nervously, or a Bearish prognosticator writing a 2000 word essay on Facebook that the Dollar is about to blow up and the U.S. is in decline. Those kinds of things happen every day.
The best kind of investing is about “not screwing up” over long time frames, letting compounding grow your wealth. When you go to sell an investment ask yourself “why am I interrupting that compounding? Am I doing something that might knock me off reaching a goal?” If you can’t definitively answer “no” find someone to talk to about the decision, why you are doing it and what you hope to accomplish.
Oh, one last thing about October, carving pumpkins is one the greatest creative pleasures in life. Do one with your family this year!