Buy and Sell Individual Stocks… or Total Stock Market ETF
When should you sell that stock you own? You bought it, you hold it, and you sell it. Decisions, decisions, decisions. How about the same questions for the Total Stock Market ETF?
What goes into your decisions to buy, hold, and sell individual stocks?
I’ll just tell you right now: I don’t care.
I never have to decide when is the right time to sell a stock. I’ll never buy one in the first place.
Let me tell you why.
When Do You Buy That Stock?
Hot stock tip? Do you know and use that product so you buy? Have kids: own Disney.
When do you buy an individual stock?
You should buy a stock when you know more about it than anyone else. If you have knowledge or insight about a company that no one else has, even the people with teams of people researching it, then you should buy it. After all, how could you lose?
Or, you could look at the evidence that less than 3% of people can beat a Total Stock Market ETF over 20 years. Of course, you are that 3%, right?
When Do You Buy the Total Stock Market ETF?
You buy the Total Stock Market ETF when you have money.
That it. Simple. If you have money that you don’t need for 5ish or more years, buy the Total Stock Market ETF.
When you have money, buy. If you get more money… buy more.
How Long Do You Hold that Stock?
Hold that stock when it loses money. After all, you don’t believe in the sunk cost fallacy, right?
And sell your winners when they are up a bit. That is called profit taking by the talking heads on CNBC when they don’t know why the market is down (which they never do, by the way).
This way you hold your losers and sell your winners. That’s the way to win!
Well, actually, evidence shows that’s just what people do when they pick individual stocks. It is hard to hold on to a winner! And it is hard to lock in a loss.
How Long Do You Hold that Total Stock Market ETF?
Warren Buffet’s favorite holding period is forever.
He made his money picking individual companies. For his estate, he instructs the trust he is leave to his heirs to… you guessed it… invest in the Total Stock Market ETF. (Actually the S&P 500 but there really is no difference in long term returns between the two indexes).
How long do you hold that Total Stock Market ETF? Hold Forever.
When Should You Sell That Stock?
Don’t sell it until the day before the market crashes. Then go all to cash. Then buy at the absolute low. Wash Rinse and Repeat!
Here is the only thing you can be certain of: you will never know when it is the right time to sell an individual stock.
When Should You Sell that Total Stock Market ETF?
When you need the money.
If the market is down when you need the money. Sell the bonds you have set aside just for that reason.
Which Is Easier To Leave to Your Kids for the Step Up In Basis?
If you have large capital gains in a stock or the Total Stock Market ETF and you want to leave it to your kids when you die to get the step up in basis, which is easier?
Would you rather hold all the stocks of the entire economy (which, if it goes to zero, you have much larger issues to worry about than taxes or legacy), or an individual stock?
Is that stock going to be around in 30 years? I encourage you took look at the stocks that made up the Dow Jones 30 years ago and see which of those winners is still around.
If you don’t buy individual stocks, you will never need to decide if the company will go out of business before you do.
Summary: This is When You Should Sell that Stock
What I like about the Total Stock Market ETF is that I never need to decide when I’m going to buy or sell it. I buy it when I have money. Next, I hold it forever; or, until I need money, then I sell it. I never have to make a decision!
With individual stocks, they not infrequently go to zero. If you have large capital gains, you have to decide if you want to recognize them, or if you want to take a chance that the underlying company is still there when you die and leave it to your heirs.
With the Total Stock Market ETF, there is no decision to make. Leave it until you die. It will still be there.
And if the market is down when I need the money? I sell bonds. After all, that’s why I have bonds, so I never have to commit the cardinal sin of investing which is selling low.
Buy when you have money, and you sell when you need money.
How about that for a plan. I don’t care what the market does day to day, because it doesn’t matter!
When you buy a stock, you have to be right three time. When you buy it, when you hold it, and when you sell it. And you have to decide every day if it is the right thing to do.
When you buy the Total Stock Market ETF, you buy it when you have money and you sell it when you need money. There is no decision making necessary to screw up your success.
After all, the hardest thing to do as an investor is get out of your own way.