A recent Fortune article by Ben Carlson of Ritholtz Wealth Management offers investors valuable insights regarding how and when it might be appropriate to sell.
“Those who actually sold a few months ago near the bottom of the bear market are in a much tougher position than those who are considering selling out now,” he wrote, adding, “but anytime you make a wholesale shift in your asset allocation it’s a challenging decision.”
Carlson offers the following examples of when it might be a good time to sell:
- When you need to rebalance. “The simplest form of selling comes when you have a target asset allocation in mind and religiously rebalance back to your target weights on a set schedule or pre-determined threshold.”
- When you need to diversify. Carlson advises investors that are transitioning from the accumulation to the distribution phase of their asset management (i.e. retirement) to avoid having to sell stocks during a “nasty bear market for spending purposes.” Even those investors with a high pain tolerance should “keep a chunk of their spending needs in cash or bonds.”
- When you’ve been proven wrong about an investment thesis. “Every investor should perform a premortem that signals when it’s time to pull the plug and bail on an investment idea that simply didn’t pan out.”
- When you’ve won the game. For those investors who have been fortunate enough to amass a sizeable nest egg (20-25 times living expenses) and “are secure enough in your lifestyle inflation, some may find it hard to continue taking so much stock market risk in their portfolio. As long as you’re willing to sit out potential future gains to avoid bone-crushing volatility, I have no problem with this strategy.”
- When you’ve determined that your risk profile, time horizon or circumstances have changed. Carlson argues that “every portfolio decision doesn’t have to come down to market fundamentals,” explaining that a change in personal circumstances—for better or worse—might require the reassessment of goals.