Warren Buffet has famously said that his holding period for his stocks is “forever,” but that doesn’t mean he never sells. The difference is that we don’t have a team of people behind us and we certainly don’t have decades of investment experience. That being said, in this article, I will go over some reasons you should sell your investments from a long-term investor’s point of view.
I have also linked a video of my 2022 Investment strategy in this video.
1. Your Asset Allocation Is Wrong
A great reason to sell your investments is that you discovered that your asset allocation does not align with your financial goals or your risk tolerance. Up until 2022, many believed they had a high risk tolerance, especially during the meme stock and SPAC pumps. In mid-2020, no matter what you bought, you made money. Then in 2022, nearly everyone is seeing their portfolio evaporate by 20 – 35% or more if they held crypto. While it is normal to feel stressed, if you are one click away from selling because it is too stressful for you to bear (get it?), it is likely that your initial allocation was way off.
The only way to get it right within a reasonable time is to rebalance your portfolio to stop the bleeding. Hence, you will need to sell one type of investment for purchase of another. Should you do it now, or later when the market recovers is another question.
What is a good asset allocation?
For the simplicity of answering this question, let’s just talk about stocks and bonds.
A good rule of thumb is using 120 minus your age. Based on this rule, if you are 30 years old, you should have 90% invested in stocks and 10% in bonds. If you are 60 years old, you should have 60% in stocks, 40% bonds. Bonds will reduce your volatility, but also your potential gains as well. My portfolio allocation is currently 60% Stocks, Real Estate is 30% and Crypto Currency is 10%. That means I feel the full reward of a bull market, but also the full brunt of a stock market crash. It sure hurt when the market crashed 40% in 2020 and I had to deal with “losing” $100,000. Thankfully, my wife and I survived our first bear market. Though it was a short-lived bear market, I learned a lot and talk about my first bear market experience here. In 2022, we are $200K – $300K down, and we are still sticking with our plan.
2. It’s part of your plan
Speaking of which, the best reason to sell your investments is if it was all part of the plan. Afterall, when everything is going according to plan, it’s hard to feel stressed about it. The hardest part is sticking with it. If your plan is to withdraw $2,000 from your investments each month in retirement, it might be hard to continue doing in a bear market and even harder during a recession.
The beautiful part of being in charge of your plan is that as you learn more about yourself, you can adjust the plan accordingly. For me, I don’t plan on selling any of my investments unless I am rebalancing, completing it as a part of my tax-loss harvesting strategy, capital gain harvesting strategy, or part of my drawdown plan. This is all outlined in my investment policy statement linked below.
3. The Government Forces Your Hand
What I am talking about here are requirement minimum distributions (RMD). After you reach a certain age, the IRS requires you to withdraw a certain amount from your tax deferred retirement accounts (401k, 457, solo 401k or IRA). If you do not withdraw a defined amount that is set for you based on your life expectancy, then you have to pay a 50% tax on the amount you were supposed to withdraw. Plus, you will still need to withdraw that money by the end of next year.
As part of the Setting Every Community Up For Retirement (SECURE) Act passed in December 2019, RMDs have been moved from 70.5 years old to 72 years old.
Fortunately, I won’t have to worry about this for myself or my wife for a long time and if you are reading this now, you won’t either. But you might want to learn about strategies to minimize forced withdraws for your parents which is why I learned about them.
Subscribe to my newsletter to be updated on when I release my plan to help my mom draw down from her retirement portfolio while paying 0-10% tax.
4. Borrowing from your 401k
You are borrowing against your 401k as an emergency measure and have researched heavily into how to mitigate any consequences of it completely ruining your retirement plans. AKA, you “know” what you are doing.
Then again, if you really knew what you were doing, you should have had an emergency fund in place to prevent yourself from taking such rash measures to begin with.
You should sell your investments if you have insider knowledge. Not just any insider knowledge. You have special intel about the government losing control of a new COVID-19 Vaccine turning all exposed subjects into flesh-eating zombies or maybe you got word on WWIII and nukes coming our way and you needed to unload your stocks before markets tanked. All kidding aside, trading on insider knowledge can lead to legal consequences, but that wouldn’t matter in an impending apocalypse anyway.
In summary, trading based on emotions is never a good idea. Make big financial decisions based on a plan that aligns with the investment strategy that you created when you are not surrounded by economic doom. As a self-directed investor, I value simplicity because it allows for consistency. I have rules that I follow based on what I read and what I believe will give me the best results based on my temperament and my goals. These rules I created for myself are outlined in my investment policy statement. If you’re interested in learning more about it, check it out in the link above.