When to sell stocks

As the stock market continues to set new record highs, you may be wondering whether now is a good time to sell stocks. Believe it or not, I don’t think there’s a universal answer that applies to everyone. Despite what you may read elsewhere or hear on TV, predicting whether the stock market will go up or down in the near future is very difficult.person selling stocks

What’s my basis for making this statement? Since 2002, the SPIVA Scorecard from S&P Global Inc. has been tracking the performance of professionally managed mutual funds compared to their benchmarks. Sadly, over long periods of time, the funds dramatically underperform their benchmarks. Through the ten years ending in 2020, over 80% of large company funds lagged their benchmark, the S&P 500 Index. In other words, 4 out of 5 funds did worse despite all the knowledge and expertise of their managers.

Another aspect of the study looks at the persistence of the outperformers which unfortunately gets more difficult over time. In other words, even if a fund outperforms one year, the chances of it continuing to outperform in future years gets less and less.

Determine how much you currently have in stocks

Fortunately, there’s another way to determine when to sell stocks which is based more on your situation than the external financial markets. The first step is determining how much you currently have invested in stocks. I’m regularly surprised when talking with people who dramatically underestimate how much they currently have in stocks. Given their risk tolerance, time horizon and objectives, they can either have too little or too much in stocks (regardless of current stock prices).

Once you understand how much you currently have invested in stocks, figuring what is appropriate is the next step. Admittedly this is a bit more complicated and requires more space than I have available. Suffice to say, if you have the majority of your portfolio in a couple of stocks or expect to draw income for the next several decades and have no stock exposure, there’s probably some adjustments needed. Before making changes, also consider the tax consequences, especially in non-retirement accounts.

Review your portfolio

When you think your allocation is appropriate, the final step is to periodically review your portfolio to make sure you have not drifted too far from your target. Ultimately, this is the answer to when to sell stocks. The more the stock market rises, the further you’ve probably drifted from the appropriate allocation resulting in the need to sell stocks. This is an important distinction since you don’t need to predict if or when the stock market will decline or whether it’s currently overvalued.

The research studies are littered with fund managers who thought they discovered a method to better predict the stock market but then found themselves on the wrong side of their prediction. Focusing on your own situation will lead to better long-term results than following the predictions of the next talking head on TV.


As seen in the Racine Journal Times | September, 2021

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