Did you enjoy the rollercoaster ride on the stock market last week? It was pretty crazy. Every time Trump tweeted a threatening message, the stock market dropped. Investors were expecting a deal to be reached, but it didn’t work out. The tariff on $200 billion of Chinese goods increased from 10% to 25% on Friday, May 10th. That’s a huge deal. Now, China will have to retaliate. Who knows where we will go from here. Buckle up because we’re going on a wild ride.
If you’re an investor, you might think it’s time to sell and sit on the sideline for a while. I already changed our asset allocation to be more conservative earlier this year so I’m not worried. Our asset allocation is now about 50/40/10. That’s stocks/bonds/alternatives. With this allocation, I can ride out the volatility without much stress.
However, that’s timing the market. It rarely works out. The stock market was on a tear earlier this year and our portfolio lagged behind. That’s the price of being more conservative. I don’t mind it for the short term because our situation is temporary. My excuse is we’re selling our old condo. Once that’s done, we can use the money to increase our stock position.
Selling has always been painful to me, though. Is it possible to avoid selling completely? Life would be much simpler that way.
Reasons to sell
Let’s examine some of the reasons why we sell our investments. I’ll start from the best reason to worst.
You need the money
The main reason why I invest is to save for retirement. When we’re older and don’t have any active income, most of us will need to sell some of our investment to pay the bills. Personally, I think this is the best reason to sell. It’s why we saved up all these years.
This reason isn’t legitimate when you’re in the accumulation phase, though. If you are earning income, then you shouldn’t need to sell your investment to buy something. The exception is when you need to buy a house. A house requires a big lump sum down payment and most of us don’t have that much cash lying around. I sold some stocks when we purchased our first home. That’s the only time I sold stock to buy something.
Selling to fund your retirement is good, but there is another way. A better alternative is to generate enough passive income to cover your expenses. We’re working on it by investing in dividend stocks, rental properties, real estate crowdfunding, and mutual funds. Once the income from these investments exceeds our expense, we won’t have to sell anything even after we stop working completely.
Another good reason to sell is to rebalance. The idea is to figure out your target asset allocation and stick to it. If you don’t know how about asset allocation, read this post first – How to figure out your asset allocation. The stock market can be volatile and most investors can’t stomach it. You can stabilize your portfolio by adding some bonds to the mix. You’ll still get most of the benefit and your portfolio will be less volatile.
This strategy is also much less stressful for the investor. You can set your portfolio to the target asset allocation and forget it. You just need to rebalance once per year. It’s the easy way to invest.
One way to get around this is to rebalance by adding new money. This is a great way to rebalance. It works well when your portfolio isn’t that big. However, new investment doesn’t change our asset allocation much anymore. Now, we need to sell to rebalance.
Long term business prospect is not good
Our tax-advantaged accounts are all invested in low-cost Vanguard funds. We don’t have to worry about selling there. However, we have individual stocks in our taxable brokerage account. These are our passive income generator. The dividend will help pay our expenses when my wife retires. Generally, I invest in solid dividend growth companies and rarely sell. However, if the long term business outlook doesn’t look good, I’d sell.
For example, we can look at Sears, JC Penny, Macy’s, and other department stores. That business model is done. I’m not sure why anyone would buy these stocks today. Can they really turn it around? I’d sell if I own any of these stocks.
Sometimes, it’s hard to tell when the turning point is. The tobacco companies are still making good money and the dividend is very nice. However, they are also killing their customers. There are fewer and fewer smokers every year. That doesn’t sound like a sustainable business. I still have a few shares of Altria (Marlboro) and probably should sell them.
Capital loss tax deduction
In the US, we can write off losses against capital gains. Sometimes, it makes sense to sell stocks to reduce your tax bill.
I did this a few times in the past, but it never really worked out for me. Last December, I sold Shell to take the tax deduction. The stock went down a bit more, but it doing pretty well this year. That always happens when I sell to take the tax deduction.
I know you can buy the stock back after 30 days, but it doesn’t work for me. I never get around to it. Selling stocks for the tax write off just isn’t a good reason to sell for me.
Last week was tough on the stock market. The trade deal didn’t work out and the tariff increased. That’s bad news and many investors sold some stocks. That’s why we see these sharp drops. Investors and banks sell their investments when they hear bad news.
However, bad news is not a good reason to sell as long as the companies you own still have a good long term business model. Apple products will become more expensive if this trade war continues. Their numbers might worsen for a while, but this trade war isn’t permanent. Eventually, it will be worked out and Apple will continue to make a ton of money. Their business model is still fundamentally sound.
What if I never sell?
Those are all the reasons why I sold stocks in the past. Selling is stressful for me and it rarely worked out well. What if I just stop selling? Is this a way to make life easier and improve the performance of our portfolio? Let’s see if it’s possible.
- Money – We don’t need to withdraw from our portfolio yet so we still have time to build our passive income. I’m pretty sure our passive income will exceed our expense when we’re 60.
- Rebalance – Unfortunately, I don’t see a way around this. I have to sell to rebalance, right? I guess I could go to 100% stocks until we’re 60. That way we won’t have to rebalance for a while. I’m too conservative to do that at this point, though.
- Business going bad – I think I might be able to live with this. Even if a few companies crashed, it would be okay if my dividend portfolio is diversified. We’ll lose some money, but not a big percentage. It’s not ideal, but I probably can handle it.
- Tax deduction – I could live without the tax deduction. It’s never that much anyway.
- News – This one is tough. I try not to pay attention to the news, but it’s not easy. I think one way around this is to have a range on my asset allocation. So our bond/cash allocation can be between 20 to 40% of our portfolio. This gives me a little room to react to the news.
Ugh! It seems my attempt to move from “buy and hold” to “never sell” isn’t going to work. I still think rebalancing is a good idea. I could limit the rebalancing to the retirement account. It’s easy to rebalance there because there are no fees.
Our dividend portfolio is a good candidate for the “never sell” strategy. It will take a while to execute, but I will go through our stocks and see what companies don’t make sense in the long run. I can get rid of those and diversify the portfolio. Once that’s done, I can just focus on buying good stocks and don’t worry about selling. Alternatively, I could just invest in a good dividend growth fund. That’s a much easier way to go.
Anyway, this post was inspired by Jason’s post – Why I will never sell another stock. I believe all his investments are in a taxable brokerage account and the allocation is 100% stocks. He doesn’t need to rebalance so this strategy is a good fit for him.
What do you think about the never sell strategy? Can you do it?
*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on our accounts. It’s a great site for DIY investors.
Image by Priscilla Du Preez
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.