Is it time to sell? September was a challenging month for the markets as the S&P 500 fell 3.7%, its worst loss since last September. The Dow Jones, NASDAQ, and most asset classes also declined last month. The fear of the downside is growing, especially if you pay attention to posts, papers, and pundits. Concerns over rising interest rates, potential persistent inflation, and the government’s overhaul of the tax system sent many investors to the sidelines.
Should you be a seller? Here is a list of seven reasons to sell stocks.
- You should sell if you need your money in one year or less. According to Dimensional Funds, the S&P 500 has averaged 10.1% per year since 1926, but it has also declined 25% of the time. Since 1998, The index has fallen five times – 2001 to 2002, 2008, and 2018. In March 2020, it fell 34%.
- You should sell if you are going to buy something with the money invested in the stock market. For example, if you want to buy a home, car, or boat, sell stocks and move your funds to a cash account.
- You should sell if you have to pay for an event like a wedding or a college education. I sold stocks in my daughter’s account when she left for college. I liquidated about a quarter of her holdings and invested the proceeds in US Treasuries. I did not want to have 100% exposure to stocks with several pending tuition payments on the horizon.
- You should sell if you are retiring in 3 to 5 years. You don’t need to sell all your stock holdings, just enough to cover three years’ worth of household expenses. For example, if your annual household expenses are $100,000, make sure you have at least $300,000 in cash in your retirement or investment accounts.
- If you have a mortgage, credit card balance, auto, or student loans, consider selling stocks to reduce or eliminate your debt, especially if your debt level is high. 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, your total debt payments should be less than $3,800.
- You should sell if your account is 100% invested in stocks. An all-stock portfolio lost 53.1% during the Great Recession (2007 – 2009). If you allocated 30% of your account to bonds, you could have reduced your risk by 27%. Since 1971, the S&P 500 averaged 11.01% per year, while the 70/30 portfolio returned 10.6% with a third less risk. Adding bonds to your account did not hinder your returns, but it significantly reduced the volatility.
- You should sell if you don’t have a financial plan. Not having a financial plan is like driving a car without a steering wheel or sailing a ship without a rudder. How can you invest if you don’t know where you’re going? A financial plan can help guide your investments and make you a better investor.
The markets are volatile, but volatility is not risk. Stocks are constantly rising and falling, but over time they produce great wealth. Bonds are safe with low risk, but they don’t grow. Since 2006, the S&P 500 has corrected several times, but it is still up 226%! In 2008 the index fell 52%. It dropped 15% in 2018, and in March 2020, it declined 34%. Short-term US Treasuries are the safest investment globally, and since 2006, they have not had any corrections or losses, but they are up a paltry 7.27%.
If you don’t need money to purchase something or pay off debt and own a balanced portfolio, stay the course with stocks and buy the dip.
“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” ~ Mark Twain
October 2, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 Dimensional Fund Advisors Returns Web – 10/1/1971 to 09/30/2021.