The stock market has only gone up, up, up the last few years.
Should you sell stocks now?
Maybe, but you should ask yourself an important question first.
Do you want to sell stocks to rebalance your portfolio or as part of your financial plan? If so, then it’s possible offloading some stock is a good move.
Or, maybe you want to sell stocks out of fear because you believe the stock market is overvalued. In that case, I have something to say about it.[toc]
You can listen to our recent podcast on the topic here or keep reading below:
Historically, fear has been a valuable emotion.
Fear has gotten humanity to where it is today.
Thousands of years ago, fear caused us to flee in terror at the possibility of a large predatory cat stalking the grassland.
And rightly so.
Obviously, fear kept us alive and unmolested by very real dangers.
But, as civilization has evolved, so has our relationship with fear. What was once a useful emotion can now circle back to bite us in the metaphorical butt.
The same can be said for having a voracious appetite.
Thousands of years ago (or maybe just as far back as college), a voracious appetite was a boon. Eating ourselves sick made sense because we never knew when the next meal would show up.
But today, that disposition to eat anything and everything has dire consequences for our bodies and our lives.
Sell Stocks Now? Why Market Timing Doesn’t Work
What does this have to do with whether or not you should sell stocks? Unfortunately, a lot.
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 (or anything else) doesn’t work. 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 matter. In fact, fees have been shown to be the number one factor that determines your investment return.
At Define Financial, we are absolutely obsessed with fees. That’s because of the overwhelming evidence that shows more fees means less money for our clients.
For us, market timing is an automatic non-starter because it means more fees. And more fees are never better.
#2: Timing the Market Can Mean Giving Up Really Good Investment Returns
The beautiful thing about never selling your investments is that you have you the chance to capture almost all of the stock market’s return. And the stock’s market return has been pretty darn good over the long run.
The alternative – trying to time the market – means giving up what has historically been a pretty good deal. 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. Don’t believe me? Check out this chart!
On a long enough timeline, you would miss out on gains if you had sold at the wrong time. 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 bumps are a less bumpy and the growth is more consistent. If that’s still too wild of a ride for you, you can always dial back your risk even more.
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.