Assuming you’re already invested in a well-diversified portfolio of low-cost index funds, the only 3 times you should sell…EVER…is:
1. Your financial goals change
2. Your risk tolerance changes
3. You portfolio needs rebalancing
That’s it. (And in that order.)
It doesn’t matter if your portfolio drops 20% in a month. It doesn’t matter who gets elected president. It doesn’t matter if another Great Recession happens. It doesn’t matter if an asteroid is heading for the planet. YOU. NEVER. SELL…
…Unless:
1. Your financial goals change. If were planning to retire in 15 years, but woke up today and decided you will retire next year, then your financial goal has changed. You need to adjust your portfolio to make it more conservative. That will involve selling some of the aggressive investments and buying more conservative ones.
2. Your risk tolerance changes. Risk tolerance is a finance-y way of describing what kind of rollercoaster ride you’re comfortable with. Some people love the “Demon Drop from Hell” and other people prefer the merry-go-round. But if “younger you” invested in the Demon Drop and “older you” now prefers the merry-go-round, then you need to adjust your portfolio accordingly. That involves selling some aggressive investments and buying more conservative ones.
3. Your portfolio needs rebalancing. Let’s say your target portfolio is 50% stocks and 50% bonds. Recently the stock market has done really well and the bond market has not. As a result your portfolio is now 60% stocks and only 40% bonds. So you need to rebalance back to 50/50. That means you sell some of the stock investments and buy more bond investments.
As Warren Buffet said in his 1990 Shareholders letter: “Lethargy bordering on sloth remains the cornerstone of our investment style.”
And as Rick Valenzi said in his weekly newsletter July 26, 2018: “Your portfolio is like soap. The more you handle it, the less you have.”
