Drawing parallels to when you should sell a long-term stock can help
When should you sell your house? Are we at the top of a real estate bubble about to burst or will real estate prices continue rising (the National Association of Realtors reported that the average price of a single-family home has increased every month for more than 100 months)? Should you hold onto your house for a few more years of appreciation because your home is your biggest investment?
Despite continued low mortgage rates and recent tales of crazy bidding wars, multiple offers and all-cash closings above asking-price, would-be-home-sellers should be cautious for a myriad of reasons. Although there are significant psychological benefits to home ownership, the hidden truth is that housing has rarely been the best use of your money from a strict investment viewpoint.
Although there’s certainly an investment component to purchasing a home, the primary purpose of owning is personal use and enjoyment. And when you buy a house, you wind up spending enormous amounts of money not only on upkeep but also on improving and decorating it. And those oft costs represent enjoyable expenditures, not investments in the property.
But let’s put the “is home-ownership-a-good-investment” debate aside for a minute. Let’s talk about when it makes sense to consider selling. And since home-ownership is clearly an investment, maybe we can draw parallels to when should you sell a long-term stock holding.
When Should You Sell?
When should you sell a long-term stock holding? The short answer is this: when circumstances change, in a big, meaningful way. Not for just a transitory blip.
The reality is that investing triggers many emotions especially when investors have a personal attachment to a company and its stock (like you do with your home). The investing landscape is littered with employees who held onto their positions in their employers’ stock, regardless of its price volatility.
- 20+ years ago, more than 62% of assets in Enron’s 401(k) were held in company’s own stock.
- The following year, the stock price went into free fall and dropped to nothing.
- Retirement plan assets were frozen; and
- Almost $1 billion in retirement was wiped out.
Ok, that’s an outlier, right? Maybe not.
General Electric was trading at about $60 20+ years ago, then after poor performance it got kicked out of the DJIA in 2018 and was trading in the single-digits (it broke into the double-digits in November of 2020 and has stayed around $12/share since).
Personal attachment to companies – especially to former employers or businesses associated with a favorite hobby is understandable, but financially dangerous. It turned out that holding GE forever didn’t work out so well.
When conditions change, investors must be willing to part with investments. You can keep the memories, but not the stock.
The notion of selling a stock runs counter to what many investors believe is prudent, because of taxes and transaction costs (not unlike selling real estate, right?). While both are valid considerations, there are still times when it is time to part ways with those long-held shares. It is not OK to keep a stock today based on its performance a decade ago.
Market Conditions Matter
Viewing an investment portfolio during times of market volatility makes it tempting to base decisions purely on a stock’s price. Though price is a major factor when purchasing a company, this is not the overriding consideration influencing a sell. What is important is to ensure the current trajectory of the economy is supporting a company’s business model and that the management is executing effectively. When those conditions change, it’s time to adjust.
Certainly, investors should be aware of taxation and transaction costs when making changes. But these things shouldn’t compel an investor to hold poorly performing stocks over the long run. You would be rich if you had a dollar for every time you heard, “As soon as (pick a company) gets back to (pick a price), then I will sell it.
Things change, and an investor’s job is to recognize those changes.
Don’t Go it Alone
Selling or buying a home can come with a lot of confusion. If you did one single thing that is most likely to get you the most money for your house when selling – or get the most house for your money when buying – it might be this: hire a real estate agent. In today’s red-hot market you might be able to go it alone, but a qualified real estate agent can help you avoid a lot of unnecessary headaches.