Tag Archives: Sell Stocks High

Selling your Stocks at Retirement

Have you ever considered selling your stocks at retirement?  Who wants to have to deal with the ups and downs of the markets when you are no longer dollar-cost-averaging?  Are you afraid of a major market crash when you are drawing down your portfolio?

The market is near its all-time high.  With retirement right around the corner, are you tempted to sell all your stock holdings and call it a day?  It might sound tempting.  This market cannot keep going up, can it?

Every investor has the right to feel exactly how they feel about all of the scary things that are going on in the world.  Don’t lose your head.  The world has always been a volatile place and unfortunately, it always will be.  If it is not one thing, it is something else.

Yes, it might be tempting to pull the trigger and sell high.  You would walk away as a winner.  Before you do that.  Let’s look at how an all-bond portfolio might serve you in retirement.

For this exercise, let us assume that you are now sitting on $1,000,000 in your 401K.  At retirement, you want to draw down 4% per year.  How would an asset allocation of 100% in bonds hold up over the course of 30 years?  To find out, I am going to run this test based on the Monte Carlo method by using the Vanguard Retirement Nest Egg Calculator.

There is a 69% chance that your savings will last 30 years.  I do not like those odds.  I especially do not like them for a person who retires early.

What about if a person wants that $1,000,000 to last 40 years?  The percentages are getting much worse.  There is now only a 36% chance that money will last 40 years.

Could you imagine going broke after being retired for 40 years?  What would you do?  Would you go back to work?  Who would hire you at such an advanced age?  Sure, employers cannot discriminate, but let’s be honest about the opportunities for someone who has been unemployed for that long.

What could an investor do to improve the chances of their savings lasting 30 years or even 40 years for those who enter early retirement?  In Benjamin Graham’s book The Intelligent Investor, he gave a few suggestions for defensive investors.  He suggests that a balanced portfolio made up of 50 in equities and 50% in bonds is a good place to start.  He also suggested that an investor should never exceed an asset allocation of 75/25.  In other words, an investor should never have more than 75% or less than 25% in equities or bonds.

I know that you are seriously considering selling your equity holdings and exchanging them for bonds.  You have told yourself that you are finished with the market.  Volatility is no longer for you.  You want to enjoy your retirement without having to worry about how stocks are performing.  If you do that, the odds are still not in your favor of not running out of money.

How would your $1,000,000 fair if you followed what the late Benjamin Graham suggested in his classic investment book?  How would keeping only 25% in equities change the projected outcome?  Would adding a more volatile asset class help or hurt the likely hood of running out of money?

By keeping 25% in equities, the percentages have dramatically improved.  There is now a 78% chance that your money will not run out over the course of 30 years with a 4% drawdown rate.  Over the course of 40 years, there is a 57% chance that your money will last.  By keeping 25% of the portfolio in stocks, there was an improvement of 9% over the course of 30 years and an improvement of 21% for 40 years.

Holding a small allocation of equities sure goes a long way.  What about if you took it a step further and went with a mix of 50% in stocks and 50% in bonds?  I know, I know. You are finished with stocks.  Keeping 25% of your money in stocks is one thing, but going to 50% is just too aggressive for your retirement account.

I understand how you feel.  You do not want to own stocks when the next recession occurs.  A long stock market correction can be scary.

During a drawdown period, how does having 100% in bonds compare to an asset allocation of 50% in stocks and 50% in bonds?  Over the course of 30 years, the 50/50 mix has an 85% chance of success.  Over the course of 40 years, the 50/50 mix has a projected success rate of 74%.  Compared to the portfolio made up of 100% in bonds, the 50/50 mix has a 16% better chance to not run out of money over the course of 30 years.  For the period of 40 years, the 50/50 mix has a 38% better chance of not running out of money.

There are many factors to consider when selecting the asset allocation that is right for your retirement.  How old will you be at the time of retirement?  How long does your money have to last?  How will RMDs impact your drawdown?  What type of lifestyle do you want to live during retirement?  Are you planning on leaving a legacy?

I am not trying to convince you on how you should allocate your portfolio during retirement.  That is ultimately your decision.  Everyone has a unique financial situation.  The purpose of this post was to examine how different conservative portfolios might perform during the drawdown period.  I am just trying to convince you to do your due diligence before you rush to any financial decisions that will impact your quality of life down the road.

After reviewing these results, it shows that diversification is still important during the drawdown period.  Just as holding 100% in stocks is too aggressive for most investors during their working years, holding 100% in bonds might be too conservative for investors during the drawdown period.  When an investor is working on building their wealth, holding a percentage of bonds helps to reduce the impact of how stock market volatility impacts a portfolio.  During the drawdown period, holding a small percentage of equities greatly improves the likelihood of not running out of money in retirement.

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Stocks: Buy Low, Sell High

When it comes to investing, the one saying that most investors have heard countless times is to buy low and sell high.  In other words, buy stocks when they are selling at the bottom of the market and sell them when they become overpriced.  In theory, this is great advice.  In practice, it is very hard for professionals to do and almost impossible for individual investors to do.

Many investors try to base their approach to buying low and selling high to where the economy is in the business cycle.  When the economy is in a recession, stocks tend to be priced low.  As the economy improves, the indexes that track the prices of stocks go up in value.  They tend to continue to increase while the economy expands.  This continues to occur until the economy falls into another recession.  A recession is generally based on two consecutive periods of negative GDP growth.  This business cycle historically runs its course about every decade.

The stock market has been making steady gains since March of 2009.  Many people have grown wealthy as the result of those gains.  That period of recovery and expansion has been going on now for over 8 years.

Many economists, professional investors, and members of the financial media are calling for a market correction based on where we are in the business cycle.  Unfortunately, based on how the economy works, they are correct.  Odds are, it will happen.  The problem is that nobody knows for sure when it will happen.  It could occur tomorrow or it might not occur until many years from now.

How can an investor buy low and sell high? To do so, an investor must buy investments that are priced low in relation to what the business is truly worth.  Not only is this hard for individual investors to do on a quantitative level, it is hard to do on a psychological level.  This requires investors to buy when the media is screaming to sell their stocks, people are losing their jobs, businesses are filing Chapter-11, and there is little hope on the horizon.

The best approach an individual investor should take is to not make investment decisions based on the current state of the business cycle.  An investment plan should be created for all economic conditions.  An asset allocation should be selected based on age and risk tolerance.  When most investors try to buy low and sell high, they end up doing the opposite.

If it is that difficult to buy low and sell high, what should an investor do?  A good starting point is to not try to time the market.  Ignore the noise coming from the financial media.  If you want to read about investing, go to my Resources page and select a book, blog, or forum that is recommended there.

As for buying low & selling high, there is a way for individual investors to do this.  It is quite simple. It is called rebalancing.

Rebalancing is realigning the asset classes of a portfolio.  Over time, a portfolio asset allocation will change because asset classes will perform differently.  Small cap stocks might perform well, while international stocks might have negative returns.  That will change the asset allocation of a portfolio.  Rebalancing is performed by buying or selling asset classes periodically based on the performance of those asset classes within a portfolio.

For example, let’s assume that an investor has a portfolio that is made up of 3 mutual funds.  The portfolio has 40% of its holdings in a bond fund, 20% in a total international stock fund, and 40% in a total U.S. stock fund.  One year later, the investor reviews their asset allocation.  Based on market performance the bond fund is still at 40% of the portfolio, but the international fund has dropped to 15%, while the U.S. stock fund grew to 45% of the portfolio.

To return this portfolio back to its desired asset allocation, the investor must rebalance the portfolio.  They must sell off 5% of the U.S. stock fund and exchange or buy 5% in the international fund.  That is simply selling the U.S. stock fund high and buying the international fund low.

How often should rebalancing occur?  Most experts suggest at least once per year.  I review my portfolio twice per year and rebalance at that point if it is needed.  Some investors do it quarterly.

When do you know it is time to rebalance?  A very simple approach is to set up rebalancing bands.  I follow a +/- of 5% rule.  As in the previous example, if an asset class is off by 5%, I will make the needed exchanges to sell high and buy the lower priced asset class.

Even though this is more structured than trying to know when to make a trade based on the headlines in the media, it is still difficult.  It is difficult because of psychology.  It requires an investor to sell an asset class that is performing well and exchange it for an asset class that is performing poorly.  It is hard for the brain stem to realize that the poor performing asset class of today will be a market leader in the future.

If an investor struggles with pulling the trigger to rebalance their holdings, there is a solution.  Many investment companies have an automated rebalancing feature.  Today, most 401K plans have an automated rebalancing feature.  It is as simple as selecting the percentage bands and frequency.  This allows investors to bypass the psychological barrier of selling off the asset call that is growing for the asset class with recent negative returns.

If you want your portfolio to have high returns while reducing risk, buy low and sell high.  The simplest way for the individual investor to do this is to periodically rebalance their portfolio.  Based on percentage bands an investor should exchange shares of the best performing asset class for those that are lagging in performance.  If an investor is struggling to follow this process, set it up where it is performed manually.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.