Co-produced with Beyond Saving.
When prices are down, investors start asking me questions that start with “should I sell.” I don’t know. Should you? If it is a hard decision, you probably shouldn’t.
Investors are frequently too eager to sell. All too often, investors will do something just for the sake of doing something. It’s what turns people who were very successful investing throughout their working life into terrible investors when they retire.
If you are a typical retail investor, you went through your working years focused on your career and family. You tossed funds into a 401K, IRA, or other savings account. You didn’t sit there staring at the market all day, every day. You weren’t making trades every day. You didn’t have the time! You bought and held. Maybe you checked your statements every once in a while. Even in most “bad” years, your portfolio probably increased by adding new capital.
Then you get close to retiring, and you start paying more attention. Retirement was always a far-off dream, and suddenly that dream is around the corner. You start watching the day-to-day price movements, and you panic.
You see prices falling. You hold some stocks down 20, 30, or even 50%. You read articles on the internet telling you that recession is around the corner. The next big crash is coming. Then it happens. That desire to do something curdles up, and you start selling.
Selling stocks is the single worst investing decision that investors routinely make.
Wealthy People Own More
Why do we invest in the stock market?
The American economy is the greatest wealth generator in the history of the world. The stock market provides us with the opportunity to own a piece of it. When you buy a stock, you aren’t buying trading cards. You are buying an ownership interest in a piece of a company that provides some kind of service or produces some kind of good.
Those who have invested in the economy have benefited greatly:
Do you want to own more?
Wealthy people are not the ones who have been selling stocks for the past 60 years. They are the people who have been acquiring them. Your investment focus should be on owning more of the economy, not less of it.
I find it ironic that so many people who have gone through the effort to open a brokerage account and save up large sums of money want to be in cash. You decided to invest in the stock market because you realized that long-term stocks are a great investment. You didn’t go to your local bank and open up a passbook savings account to dump your money in every paycheck. What changed?
I own my chunk of the economy today. My goal is to own more of it, not less.
Own The Economy, Don’t Trade It
I’m a business owner. I started “High Dividend Opportunities” (or HDO) in early 2016, and it has become the largest service for income investors on Seeking Alpha. Like any other business, we have our ups and downs. In some quarters, we grow more quickly than others. I don’t own HDO stocks for only one year. I don’t sell it when we have a particularly good quarter or when there is a challenging quarter. I’m a business owner every single day, and I will be forever. My plan is not to sell HDO stocks for some large sum of cash. I own them for the dividends, and for the recurrent cash they produce.
I approach my stock investments with the same outlook. I’m not buying shares in companies with the intent of selling them at a higher price. My goal, every year, is to expand how much I own, and thus grow my recurrent income. Each share of stock I buy is another source of income, being funded by the cash flow of the businesses I own. Why would I sell my income? Now, that is great planning for my future and for my retirement.
Operate Your Portfolio Like A Business
Not every investment works out. Sometimes you put time and effort into plans that just don’t produce a profit. When you are running a business, you will occasionally sink money into efforts that don’t prove to be worthwhile.
Amazon (AMZN) founder Jeff Bezos has publicly discussed the many failures of AMZN as being critical to AMZN’s success. It didn’t matter that AMZN lost billions investing in lines of business that ultimately weren’t profitable. The lines that became profitable are far more significant.
Investors spend too much time worrying about investments not working out. If you invest long enough, it will happen. Some investments will fail. Dividends will be cut, companies will file for bankruptcy, and occasionally there will be some investments that are outright frauds. That’s ok.
I’ve had my fair share of investments that didn’t work out. Writing about them publicly, I have a loyal following that is happy to remind me of the losses. Yet, like with AMZN, these losses are an irrelevant portion of my returns.
It is very easy to protect yourself from these losses. No, it isn’t always easy to avoid them, but it is easy to make them irrelevant.
I have routinely preached the Rule of 42. You should aim to own at least 42 stocks. This means that your average position would make up approximately 2.4% of your portfolio.
If all of your positions are only 2-3% of your portfolio, what happens if one position fails? Even if it went all the way to zero, your portfolio loss is only 2-3%.
No, You Cannot Predict The Future
We see it all the time when discussing investments. Folks will state with utter certainty that something will happen in the future. Buying stocks is all about trying to predict which companies will do well in the future. So, we always have to try to keep our eyes on the horizon. Yet, it is dangerous for us to assume we are right.
For example, I have predicted that a recession will happen in late 2023 or early 2024. I’ve laid out my arguments for why I believe this through numerous Market Outlooks over the past year.
When investors believe they know what will happen, they frequently make the mistake of betting everything that they are right. Well, we can all be wrong. In fact, we will all frequently be wrong.
Prior to 2022, I predicted that the Fed would remain dovish and rate hikes would be mild. I could have plowed my whole portfolio into investments that would benefit from a dovish Fed. I didn’t. Instead, I preached taking an agnostic approach to rates, having some holdings that would benefit from rising interest rates and some that would benefit if rates didn’t rise.
Never assume you know the future. Sometimes, you will be dead right. Other times you will be dead wrong. Don’t gamble everything on your ability to predict the future.
Make sure you always have a diversified portfolio, with some holdings that will benefit if you are right about the future but also some holdings that will benefit if you are wrong. At all times, every holding in your portfolio should be a company that you are perfectly comfortable holding long-term.
Sell When It Improves Your Portfolio
There will be times when you need to sell investments. Just like a business occasionally needs to throw in the towel on a business line that just isn’t going to be profitable.
When should you sell?
- You realize your investment thesis was wrong. When you initially invested, maybe you expected some events to happen, and they didn’t. For example, maybe you expected the company to deleverage, but they are not making progress fast enough, and the risk of a dividend cut is increasing.
- The company changes its strategy and no longer aligns with your goals. Occasionally, a company makes a radical change in strategy. Newtek (NEWT) was one of our favorite BDCs, and management decided to convert to a bank holding company. We sold immediately, as NEWT was attractive to us because it was a BDC.
- You can achieve a better return with less risk or improved diversification.
- When the market offers you a price that is higher than you believe the investment is worth.
Whether you have a gain or loss on the investment is irrelevant to the decision to sell.
When shouldn’t you sell?
When your emotions are leading the way. It is easy to get emotional when investing. Our portfolios represent “a lot” of money. When you are selling, you need a very clear head. If you are not in a headspace where you can pinpoint what is wrong with the company and why you no longer believe in the long-term future of the investment, it is best to err on the side of holding.
Selling stocks should be approached with every bit as much seriousness and diligence as buying a stock. After all, you are selling off a business that you previously decided was valuable.
Always Be A Buyer
The approach to investing that has become standard advice in the investment industry is that you should buy up stocks while you are working and then fund your retirement by selling off stocks.
This is terrible advice. You bought stocks because you recognized the value they have in building wealth. Why would you sell?
At “High Dividend Opportunities” we provide our members with a “model portfolio” of dividend stocks, preferred stocks, and baby bonds, with a target yield of +9%. Our Income Method offers an alternative solution. Don’t fund your retirement by selling off your hard-earned assets. Fund your retirement by withdrawing the cash flow produced through dividends and interest. Then, take a portion of that income – I recommend 25% – and reinvest it.
If you follow this plan, you will buy more dividend stocks when you are 60, 80, and even 100 years old. The income from your portfolio that is being reinvested will buy more shares, producing more dividends and grow your income further. Every year, you will own more of the economy, and you will collect more dividends than the year before.
It doesn’t matter if prices fall and the whole market is red because you are a buyer. Lowers prices are always a positive for the buyers!
Whenever I buy a company, I buy with an outlook that I will hold forever. I’m not buying looking for a quick flip, hoping that some sucker will be willing to pay more than I believe it is worth. I am buying a business that is paying a big dividends and providing me a great cash flow, and I believe that it will continue to produce those dividends indefinitely.
It is true sometimes investments will disappoint. Some will cut their dividends and might fundamentally change. This is why at HDO we diversify. The handful of dividend cuts will be overwhelmed by the dividend raises you will experience.
I’m not looking through my portfolio for excuses to sell. I want to own more of the economy. I want to own more companies that are providing me with more income.
I’m not buying with the plan to sell. I’m buying and holding the economy forever!