When should you sell your stocks?

Ben Carlson reminds us that there is always going to be a good reason to sell out of the stock market. When stocks were getting slaughtered in March, investors wondered if they should sell because it felt obvious stocks would fall further. Now that stocks have rallied, investors are wondering if they should sell because it feels obvious stocks have risen too far, too fast.

So when should you sell some or all of your stocks?

1.   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. The timing of a rebalance will never be perfect but setting up a specific asset allocation that takes into account your willingness, ability and needs to take risk removes the temptation to go all-in or all-out based on your gut instincts and sell based on a set plan.

2.   When you’ve been proven wrong about an investment thesis: This one is more relevant for those who hold more concentrated positions in a single stock. 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. This can be harder than it seems because What if I just wait until it breaks even?! or What if it rallies right after I sell?! are both rather compelling arguments in a loser position.

3.   When you’ve won the game: If you’re lucky enough to amass something in the neighbourhood of 20-25x your expected living expenses in retirement and have a decent handle on your spending habits, at a certain point you may ask yourself—What’s the point of playing anymore?

4.   When you’ve determined your risk profile, time horizon or circumstances have changed: Every portfolio decision doesn’t have to come down to market fundamentals. You must also consider how your current circumstances impact your risk profile. Sometimes you need to dial down the risk because you’re in a better place financially than you expected. Maybe you received an unexpected windfall or aren’t spending as much as you budgeted for.

Carlson concludes that it is impossible to create a portfolio if you don’t have a handle on your goals and a reason to invest in the first place. Markets matter but you should always begin the investment decision-making process by thinking about where you are—and where you’d like to be.