18. When Should You Sell? Flashcards
(31 cards)
Why is choosing when to sell an investment difficult?
Because it involves facing behavioral biases like fear of missing out and fear of losing money.
What are the three cases in which you should consider selling an investment?
- To rebalance
- To get out of a concentrated (or losing) position
- To meet your financial needs
What is the overarching strategy regarding when to sell an investment?
Sell as late as possible, ideally over time.
What is rebalancing in the context of investing?
Rebalancing is adjusting the mix of assets in a portfolio to maintain a target allocation.
What happens to a portfolio without rebalancing over time?
It drifts from its target allocation, becoming dominated by its highest returning assets.
What is the typical outcome of a ‘Never Rebalance’ strategy over 30 years?
The portfolio tends to hold 75%–95% in stocks.
Why might rebalancing be seen as detrimental to portfolio performance?
Because it often involves selling higher-growth assets (stocks) to buy lower-growth assets (bonds).
What is the purpose of rebalancing a portfolio?
To control risk and maintain the intended risk profile of the portfolio.
What is maximum drawdown in the context of portfolio management?
The maximum decline in value from the highest point of a portfolio within a certain period.
How does rebalancing typically affect maximum drawdown?
Rebalancing generally reduces maximum drawdown by shifting funds from higher-volatility to lower-volatility assets.
What is the recommended rebalancing frequency for most investors?
Annual rebalancing.
What are the two reasons for recommending annual rebalancing?
- It takes less time
- It coincides with annual tax season
What is the accumulation rebalance strategy?
Rebalancing by buying the underweight asset instead of selling.
When is the accumulation rebalance strategy applicable?
It is applicable only during the accumulation phase of investing.
What is a concentrated position in investing?
A situation where a significant portion of wealth is tied up in a single security.
What should you consider when selling a concentrated position?
Your financial goals and risk management.
What is a selling methodology?
A predetermined plan for how much and when to sell an investment.
True or False: Rebalancing should be done frequently in taxable accounts.
False.
Fill in the blank: The optimal strategy for selling is to have a __________.
[predetermined plan]
What is a recommended selling methodology for investments?
Find a selling methodology and stick to it, such as selling 10% chunks every month or selling based on price levels
Predetermined rules help remove emotion from the selling process.
Why should you avoid selling all your investments at once?
Due to tax consequences and the possibility of regret if the price skyrockets
Selling a portion minimizes regret if the remaining investment decreases in value.
What is the median one-year return of individual stocks in the U.S. since 1963?
6.6%, including dividends
This is compared to a 9.9% return for the S&P 500 over the same period.
What does holding a concentrated position in stocks illustrate?
The risk of underperformance compared to the overall stock market
Individual stock performance can vary significantly from the market average.
What should you consider when deciding to sell a losing position?
Whether your beliefs around an asset class change or if the position continues to decline
This is based on fundamental analysis rather than emotion.
