With 2018 already half over, the U.S. stock market (NYSEARCA:SCHB) is outperforming its global peers, plus it still trades near all-time highs. Is it time for investors to cash in their equity holdings?
The perennially dilemma for investors and traders – right after when to buy – is but of course, when to sell.
Investing legend Philip A. Fisher wrote the following about the subject:
“There is another and even more costly reason why an investor should never sell out of an outstanding situation because of the possibility that an ordinary bear market may be about to occur. If the company is really the right one, the next bull market should see the stock making a new peak well above those so far attained. How is the investor to know when to buy back? Theoretically it should be after the coming decline. However, this presupposes that the investor will know when the decline will end. I have seen many investors dispose of a holding that was to show stupendous gain in the years ahead because of this fear of a coming bear market. Frequently the bear market never came and the stock went right on up. When a bear market has come, I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price. Usually he either waited for them to go far lower than they actually dropped, or, when they were way down, fear of something else happening still prevented their reinstatement.”
Fisher, like many investing greats, suggests the best time for an investor to sell is almost never under the strict understanding the security they have purchased is the right one. The problem is most investors need to sell, at least eventually, because they need the money. The other problem is that most investors buy the wrong stuff.
Fisher’s point is well-taken, but it’s dogmatic and has little allowance or flexibility for real life situations that would trigger an investor to sell their holdings.
Let’s exam a few situations on when to sell:
1) If you locate a better investment opportunity for your capital. There are certain situations that arise when the light-bulb goes off and the discerning investor realizes his or her money is best spent elsewhere. For instance, crypto-currencies were great in 2017 but are now stuck in a severe bear market and are for all purposes dead money. Instead of watching the value of your money sink like the Titanic and stay there, re-positioning your money into another productive asset with better growth potential would be a solid reason to sell.
2) If you’re selling to increasing your portfolio’s cushion. All investors and traders should have a margin of safety or cushion built into their investment portfolios. It’s a fundamental step that I teach in my portfolio building classes at ETFguide. Moreover, it’s a rigorous and disciplined approach to investment management that follows the same spirit of Benjamin Graham’s margin of safety idea, but applied to a person’s entire portfolio. So if you’re selling positions within your portfolio to increase your portfolio’s cushion, you deserve to be commended. Having a margin of safety that’s compatible to your risk tolerance, your age, your time horizon, along with your overall financial objective(s), is something to be celebrated not criticized.
3) If you need the money. It’s easy for multi-billionaires to lecture the investing public that everybody’s investing time horizon should be “forever.” The chief flaw with this fanciful theory is that a) most people aren’t billionaires and at some point, whether it’s for retirement or another pressing need, will thus need access to their money, and b) all people, billionaires included, die – thereby invalidating the sophomoric idea that investments should be held “forever.” (On the other hand, if your life-span is guaranteed to be “forever” go-ahead and hold your investments for however long you wish.) If you need the money to pay down debt, to fund your retirement, or another major expense, don’t feel one iota guilty about locking in some gains.
Choosing when to sell your investments can be challenging – both psychologically and emotionally. But if you follow a framework for exactly knowing under what circumstances its OK to sell a highly appreciated asset, you’ll likely have many fat profits to go along with something else the investing masses rarely achieve: Peace of mind.