Deciding when to sell is the hardest part of investing because most discussions focus on when to buy. This is not only with stocks and bonds, but currency, real estate, gold, art, and other commodities. Financial markets are constantly changing: interest rates, stock prices and currencies are always fluctuating due to competition, recessions, and down turns. For the past year we’ve discussed the logistics of being in a bond and stock market bubble.
According to Bank of America Merrill Lynch, “U.S. stocks continue trading above nearly all metrics we track…” The S&P price to earnings multiple (what you are paying for future growth) is at a 13½ year high at 17.7x, which makes it a high price for expected earnings.If you only look at the past 12 months, the market is up 13.5% and earnings are up 14%, why ch makes sense, but the longer-term picture is very different.
Over the past 8 ½ years, the S&P is up 242%, but earnings are actually below 2013, 2014, and 2015 levels,in fact there has been NO earnings growth in 10 years. To make it worse the numbers are actually adjusted for 15.4% cumulative inflation, therefore, real earnings have actually declined, while the market has increased exponentially.
Shouldn’t there be a correlation between the stock market growth and earnings?There should be, but when the Central Banks created liquidity by keeping interest rates low and providing bailouts,they provided cheap money, which led to higher asset prices as well as the highest debt levels in history for corporations, individuals and governments.
Even today, the banks are still in stimulus mode, keeping rates lower than inflation.
For investors this means you need to re-evaluate the price you’re paying for companies. There are many reasons that can change the tide, higher inflation, rise in interest rates, higher U.S. dollar, lower earnings growth forecasts, geo-political issues, decrease in auto sales and the housing market, China slows or most likely some unknown Black Swan event.Success depends on understanding why you invested in the first place and what your goals are for each investment.
HERE ARE FIVE STRATEGIES TO HELP WITH THE TOUGHEST PART OF INVESTING:
1. Remember WHY you bought the asset
If your fundamental reason for the purchase was for the dividend, income, or future capital gains due to the value, and the present (price) or future expectations are not there, or less likely, then you have reached your goal and should sell. Eg. If you purchased because the investment was a low price to earnings and is now a high price to earnings, then your reason for owning the asset is no longer valid.
2. Rebalance you Portfolio
Most people only own mutual funds which are made up of stocks and bonds. True diversification is to have five non-corresponding assets including stocks, bonds, mortgages, real estate, gold, and commodities. Assuming you have 5-20% in each, and one does really well, rebalancing theory says to sell some of the asset that has outperformed and put the proceeds into the non-performing asset, thus keeping the balance in check.
3. Sell for a Better Investment
One of the greatest investors of all time, Sir John Templeton, suggests that the new investment should be at least a 50% better investment to make the change. Let me explain.
True value of asset A & B =$100
A trades at $50
B trades at $40
Difference is $10
$10/$40 = 25%not worth the trade
A trades at $50
B trades at $30
Difference is $20
$20/$30 = 66%Sell A, Buy B
4.Stop Loss
This is an order to sell a stock or a market that you have invested in at a lower price than purchased, thus limiting your loss. It can also be adjusted higher to lock in gains.Purchase at $30.Put in a stop loss order at $27 (only willing to lose 10%).If stock moves up to $40.Put in stop loss at $37 (get to ride any upside but are limiting your downside).
5.Sell because you have reached your goal
Money (investments) is simply a means to an end. It should be working for you and giving you peace of mind. These assets are useless on their own, its what you do with them that matters. Be that taking a year off, purchasing a home, or retirement. When your goals are reached it is time to sell and enjoy what you’ve earned.
Our platform at Middleretirement helps you work through each of these strategies so you are never alone with your investments. We help you take control, empowering you each step of the way. There are answers in front of you. We are here to help our clients reduce fees, avoid unnecessary risk, and understand what they own and why.
"We are with you every step of the way."
Steve,
