I was recently asked, “With stocks at record highs, should I sell some of my stock holdings?” My response was that I’m selling some of my stock funds, though perhaps for very different reasons. If you’re wondering the same, here’s how to look at such a decision.
Look at the bigger picture
As of Aug. 8, U.S. stocks are up 11.1 percent year-to-date, and international stocks are up 19.2 percent in total return, including price appreciation and dividends reinvestment. Yet the bigger picture is that the bull market is now over eight years old and won’t last forever. In fact, the U.S. stock market is up about 346 percent since it bottomed on March 9, 2009. This means that $10,000 invested in the Vanguard Total Stock Index Fund ETF (VTI) is now worth about $44,600, which equates to a 19.4 percent annualized return.
Of course buying at the bottom assumes you have perfect timing, which few have. But even taking the opposite extreme with the worst timing, buying that same index fund at the height of the real estate bubble on March 9, 2007, nearly doubled your money. Your $10,000 became worth about $19,860, equating to a relatively respectable 7.2 percent annualized return.
Two lessons from the bigger picture
The first takeaway is that time in the market is more important than timing the market. Rather than betting on timing, we should stay in the market and bet on the capitalism that statistically tends to work in the long run. Don’t move in and out of the market because you think you know what will happen in the next year or so. My investment advice is the same under President Trump as it was under President Obama.
The second takeaway is that sticking to an asset allocation target works. By that I mean having a certain percentage in risky assets such as stocks and stock funds, and a certain percentage in lower risk assets such as boring bonds, CDs and cash. My own allocation is 45 percent stocks and 55 percent bonds, CDs and cash. It’s fairly conservative because I’m fairly frugal and my need to take risk is low.
When stocks peaked in 2007, I had to sell some of my stock funds as they surged to get back to my target. Conversely, in late 2008 and early 2009, I had to buy because the plunge caused me to have far less than my target in stocks.
In practice, sticking to an asset allocation requires selling when stocks go up and buying when they plunge. As simple as that strategy sounds, it goes against the human instinct that compels us to buy after a surge and sell after a plunge.
So with stocks continuing to rise so far this year, I’m selling and reallocating to maintain my asset mix. I do this even if I have to pay taxes. I’m not selling because I think I have clue how the market will perform over the next few months, but because I want to manage risk and continue to buy low and sell high.
Accept the fact that no one can predict how the stock market will perform. I know people who got out of stocks after the 2008 plunge who are still waiting to get back in. You’ll do better ignoring your instincts and so-called experts, and picking an asset allocation that is right for you and sticking to it.