Is it time to sell everything? You should not sell everything but you may want to sell something. The stock market continues to underwhelm in 2016 and this trend looks like it may remain in the near term. The fear of the downside is real and growing among investors especially if you pay attention to the posts, papers and pundits. The general consensus among the masses is for the doom and gloom to linger.
Should you be a seller? Here is a list of individuals who should sell their stock holdings.
1. You should sell if you need your money in one year or less. According to Morningstar and Ibbotson the stock market has made money 73% of the time on a one-year basis between the years of 1926 and 2014. However, the range is wide. The best year was 1933 with a gain of 53.99% and the worst year was 1931 with a loss of 43.34% (Ibbotson®SBBI® 2015 Classis Yearbook).
2. You should sell if you are going to buy something with the money invested in the stock market. If you are going to buy a home, car, boat or plane then this money should be in cash.
3. You should sell if you have to pay for an event like a wedding or a college education. My daughter will be leaving the nest soon and heading off to college in the fall. As a result, I sold half of her investment account two years ago and invested the proceeds in U.S. Treasuries knowing that a tuition payment is imminent. I did not want to have 100% exposure to stocks before she left for college.
4. You should sell if you are retiring in 3 to 5 years. You don’t need to sell all of your stock holdings just enough to cover 3 years’ worth of household expenses. For example, if your annual household expenses are $100,000, then you should have at least $300,000 in cash in your retirement or investment accounts.
5. You should sell if you are up to your eyeballs in debt. This can be mortgage, credit card, consumer, auto or margin debt. Debt is debt and the less you have the better. A rule of thumb is that your total monthly debt payments should be less than 38% of your gross income. For example, if your gross income is $10,000 per month, then your total debt payments should be no more than $3,800.
6. You should sell if you don’t have a financial plan. If you don’t have a financial plan, this is analogous to driving a car without a steering wheel or sailing a ship without a rudder. How can you invest your assets if you have no idea where you are going? A financial plan will help guide your investments and make you a better investor. A well-constructed financial plan will be your life guide.
7. You should sell if your account is 100% invested in stocks. A portfolio that is invested in 100% stocks has had an average annual return of 10.1% with a standard deviation of 20.1. A portfolio that is 70% in stocks and 30% in bonds has had an annual return of 9.2% and a standard deviation of 14.3. The bonds reduced your risk by 29% and your returns by .9% per year. The time frame for these returns is from 1926 to 2014. (Ibbotson®SBBI® 2015 Classis Yearbook).
8. You should sell if you can find a superior long term investment that outperforms great American and International companies.
9. If you do not fall into one of the above categories, then you should be a buyer of stocks!
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com