For many investors, it’s a question just as pressing as what stocks to buy: “When should I sell my stocks?”
Like many of the worthiest conundrums in life, there are endless ways to approach the question. Warren Buffett famously said, “Our favorite holding period is forever,” a philosophy evidenced by his highly successful buy-and-hold strategy. Others might tell you to sell when a stock’s price-to-earnings ratio rises to historical highs, while still others may advise selling after enjoying a certain percentage gain or when a dreaded technical signal rears its ugly head.
Everyone has their own investing style and financial needs — and we don’t pretend to know them. Necessarily, we answer this oft-asked question from a long-term perspective, and as it generally pertains to the stock market as a whole.
With our scope now defined, the answer to “When should I sell my stocks?” becomes rather simple. Uncle Warren is right — never sell your stocks.
Unrivaled Long-Term Returns
The issue of when to sell a specific stock requires far more attention and study than the issue of when to sell the broader stock market as a whole. The greatest investor of all time, Warren Buffett, essentially does away with this constant, nagging question with a simple criterion: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
In other words, if there’s a possibility the underlying business could be uprooted, disrupted, or otherwise crushed in the next decade, Buffett would say the time to sell that particular stock is now. As someone who’s led Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) Class A shares to trade above $215,000 a pop, I tend to trust the guy’s market wisdom.
As for the stock market in general, the first and foremost rule that investors should remember comes courtesy of John Bogle, legendary investor and founder of the Vanguard Group mutual fund family. Of market timing, Bogle said:
“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”
Peter Lynch, another Wall Street icon who guided Fidelity’s Magellan Fund to 29.2% annualized returns between 1977 and 1990, expresses a similar frustration with market predictability in his book One Up On Wall Street (1989):
“I’ve yet to find a reliable source to inform me how much it will go up, or simply whether it will go up or down. All the major advances and declines have been surprises to me.”
In other words, trying to time the market is a fool’s game. It’s simply best to always be invested in the stock market. To illustrate this point, consider the inflation-adjusted returns (through 2011) of the following asset classes for the past 196 years. Assuming the reinvestment of all gains, $10,000 in 1815 would’ve turned into:
- $5.6 billion if invested in the stock market.
- $8 million if invested in bonds.
- $26,000 if invested in gold.
If those preposterous numbers somehow aren’t convincing enough, stocks also consistently and significantly outperformed bonds in the periods between 1928-2014, 1965-2014, and 2005-2014. As you may recall, the last period includes the greatest financial crisis since the Great Depression.
A Small Caveat
While stocks, in the long term, are far and away the most rewarding investment vehicles on earth, most investors prefer to avoid the wild volatility of the stock market and aim to have widely diversified portfolios across several asset classes. Diversification is a vital part of investing and becomes more and more important as one ages: retirees simply can’t rely on the stock market for income in their golden years.
That said, if you’re financially able to buy an index of U.S. stocks and forget about it for 12 to 15 years or so, it’s extremely unlikely that your nest egg will lose value in that time. Even if you had the extreme misfortune of buying the S&P 500 at its then-peak of 1,565 in October 2007, your investment would be up about 33% to date.
So in short, the answer to the question “When should I sell my stocks?” is this: if you have patience, never. And if you don’t have patience, well, be prepared for a bumpy, unpleasant ride.