When to sell stocks
The stock market has been bullish for quite some time, and has many investors concerned that a crash is imminent.
Should you sell stocks now?
Maybe, but you should ask yourself this important question first…. Why?
Do you want to sell stocks to rebalance your portfolio or as part of your financial plan? Offloading some stock for these reasons is a good move.
Or, maybe you want to sell stocks out of fear because you believe the stock market is overvalued.If this is the case, we have something to say about it…
SELL STOCKS NOW? WHY MARKET TIMING DOESN’T WORK
Recently, I was working with a new client when she shared a story of how her friend’s financial advisor got her out of the market during the recent financial crisis. The fearful advisor saw stocks losing value and decided it made sense to sell stocks.
Unfortunately, selling based on fear is not effective. If you’ve read up on this subject, you may be familiar with the idea that a strategy of selling when the market drops (called market timing) is rarely successful. That’s because your timing doesn’t matter nearly as much as where you put your money.
IMAGINE NEVER SELLING YOUR INVESTMENTS
If market timing doesn’t work, then when is your alternative? If you’re not going to sell stocks when you get scared or hear something crazy on television, what should you do?
The answer is simple: Hold your investments forever. Believe it or not, this works. Here are a couple of reasons why:
#1: TRANSACTION COSTS EAT UP GAINS FROM TIMING THE MARKET
When you hold an investment forever, you don’t incur any additional fees. And, no matter what anyone says, fees have been shown to be the number one factor that determines your investment return.
#2: TIMING THE MARKET CAN MEAN GIVING UP REALLY GOOD INVESTMENT RETURNS
The beautiful thing about never selling your investments is that you have the chance to capture almost all of the stock market’s return, which has been very good over the long run.
The alternative – trying to time the market – means giving up these long run returnsl. Trying to time the market involves a lot more risk.
No matter what any “stock guru” says, the odds are pretty bad that someone has enough skill to do better than a low-cost, buy-and-hold strategy.
WHY GETTING OUT OF THE STOCK MARKET MAY NEVER MAKE SENSE
Stocks have been going up in value for a very long time.
On a long enough timeline, you would miss out on gains if you had sold at a market dip. That’s because stocks go up in value over very long timelines. It’s just what they do!
Anyone squinting at the chart provided will notice that there are quite a few bumps along the road. And those bumps can mean YEARS of negative investment returns.
But, that’s okay. This is a reason why you want to diversify your portfolio. Below is what your stock market return would have looked like with a 50/50 mix of stocks and bonds up through 2015.
When your portfolio is properly diversified, the growth is more consistent. If that’s still too wild of a ride for you, you can always continue to reduce your risk.
IT’S OK TO SELL SOME OF YOUR STOCKS, SOMETIMES
Finally, I want to make the distinction between never selling all your investments versus never selling a small piece of your investments. Despite all the proof I’ve shared that “hold forever” is the best investment strategy there is, there are the times when it can make sense to sell some of your stocks.
You definitely want your investments to reflect your personal goals over the long-term. But, not all investments grow at the same rate. Rebalancing is the act of selling some investments that have strayed from their original target.
#2: LIFE CHANGES
As you get closer to retirement or any other big life change, it may make sense to reduce your risk. This often means selling stocks (the risky part of your portfolio) and buying more bonds (the relatively safer part of your portfolio). This is a natural part of the investment process. As you get farther away from retirement, it can sometimes also make sense to turn the risk up a notch, trading up some of your bonds for a few additional stocks.
Anyone who has ever done any research on the subject has come to the conclusion that market timing just doesn’t work. With that in mind, you’ll probably want to get cozy with the stocks you have and the ones you plan to buy in the future. If you’re investing the right way, you’ll have them for a long, long time.