EP: 147 December 2023 Investment Insights

Advisors and co-hosts Zachary Bouck, CIMA®, CFP®, and Austyn Garcia, recap our December portfolio meeting, discussing what happened in the markets over the last month, our approach to traditional asset allocation (cash, fixed-income, equities, and alternatives), and our general outlook for the next 6-12 months in the markets.

How NOT to Sell Your Investments

By: Zachary Bouck, CFP®

I could have called this blog "How to Sell Your Investments," but that would be inappropriate considering the year we've had (now only two months in). I've been a professional financial advisor for more than a decade now, helping hundreds of clients through the market's ebbs and flows (see: 2008-2010). An article on how to sell your investments would have been more appropriate for a year like 2020 when the market was up triple digits. In years like 2022, however, investors are naturally reverting to a 'safety' mindset, strongly considering selling their investments out of fear that their account balances may continue to go down. It’s not a foolish thought – losing money is no fun. But when you look at what the average investor has made over the past 20 years, you should realize that the thought processes they use to invest are dangerously flawed.

The average investor loves buying when the market is going up, and inevitably gets worried and sells out when the market starts going down. It’s human nature to handle your investments in such a way – as we all know the pain of losing money is far greater than the joy of making it. I’ll help you understand when and why you should consider selling an individual investment. Whether you decide to sell or not sell, you will continue to face this decision throughout the rest of your life, so working out a clear philosophy is important.

The decision to sell is one that everyone struggles with – and I mean EVERYONE. Warren Buffett talks about unforced errors in selling investments too soon – like Disney in 1960 – a sale that cost him tens of billions of dollars. Hanging on to investments too long can also cost lots – like buying and holding clothing manufacturer, Berkshire Hathaway, as it continued to lose money as domestic manufacturing became less profitable.

As you can see, selling an investment is challenging.

Instead of facing each investment sale as a one-off decision – it is helpful to establish a philosophy of what types of investments you should sell, and what type of investments you should never sell – or at least be less likely to sell.

A framework for what you should be selling

Here is the philosophy that I’ve found is most helpful when describing this framework for clients. Our company, Denver Wealth Management, has over 600 households. And while we manage most of our clients’ investable assets, almost all our clients have one-off assets that they need to consider selling or keeping. Things like watches, crypto, real estate, stocks that appreciated dramatically, company stock – you get the picture.

So, when is it appropriate to take a gain and when is it appropriate to hold on for that glorious long-term compounding that turns ordinary folks into multi-millionaires?

I’ve found that it’s best to organize your investments into two different broad categories.

Category One: Long-term compounders

Category Two: Speculation or rapid appreciation

Long-term compounding investments are investments that you should never sell unless the fundamentals of the underlying investment are deteriorating. These investments are generally purchased with the mindset that the price appreciation and dividends will reward you as a shareholder for a very long time period.

Think of a company like Walmart, whether you bought it in 1980, 1990, 2000, 2010, or 2020 it has generated a long-term positive rate of return. There were a lot of years that it underperformed the broader market, and many years it outperformed the broader market. There were years where investors assigned a high growth multiple and others where that growth multiple was dramatically lowered. But given a long enough time period, Walmart has always generated a positive return for investors.

This is because the underlying business of Walmart has remained strong due to its successfully implemented long-term growth plan. If that growth plan ever ceases to be successfully implemented, or if the CEO begins making shocking errors in judgment, then perhaps selling the investment makes sense.

In our experience, it’s better to be slow to sell – especially with a great company that has a great track record. The same can be said of mutual funds with consistent long-term results. A good management team or philosophy will always have the occasional down year – but if you sell your investment every time it’s down, you will consistently be generating less money than the overall market.

In the end, the decision to sell a long-term compounding investment is always a judgment call. Some great decisions will be made, as well as some errors. But keeping long-term compounding investments through ups and downs has historically benefited long-term investors.

What to do with big gains

Now, what about speculation? Speculation is when you are trying to make a buck. You’re not really concerned with the underlying business or investment – you think the cost of something will go up, so you buy it now, hoping to sell it for more later. You buy crypto for X dollars, not because it’s going to change the world, but because you think you can make some money. Almost everyone I know with an investment account occasionally wants to play around in the speculation game. This is where I see people get burned the most.

If you buy a stock at ten dollars thinking you’ll make a quick buck – then it goes to $20, and all the way up to $80 – it’s easy to think that the stock will continue to grow and that you’ve found a gold mine.

If you buy a stock at $80 and it drops down to ten dollars, it’s easy to think the price will rebound soon, and you’ll sell when it gets back to $20.

Both examples are how speculators hurt themselves. The most consistent process for speculation I have seen is to:

1) Write a hypothesis for the trade, ‘I think stock X will do this; therefore, I will buy it at $Y and sell it at $Z.

2) Set a maximum loss, ‘If stock X goes down Y% I will determine my hypothesis was incorrect and sell it.’

3) Set a maximum gain, ‘If stock X goes up Y% I will consider my trade a success and sell it.’

Then use your newfound riches to buy long-term compounding investments or your next speculation. But don’t let your speculations rise or fall for long time periods – remember they are not long-term plays.

Investors need to identify and differentiate the ideal outcome for their investments. Long-term compounders are to be held through bull market and bear market alike. Speculative investments should be sold after the numeric goal is achieved. 2022 seems to be a good year to hold on to your long-term compounding investments and it may be a good time to say goodbye to many of your speculative investments.

Disclosures: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, Inc., a registered investment advisor. Denver Wealth Management, Inc. is a separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no indication of future results. Growth investments may be more volatile than other investments because they are more sensitive to investor perceptions of the issuing company's growth of earning potential. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Any individual securities mentioned are for reference only and are not intended as a recommendation to buy or sell. Investing in mutual funds involves risk, including possible loss of principal. Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance. All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.

EP: 146 November 2023 Investment Insights

Advisors and co-hosts Zachary Bouck, CIMA®, CFP®, and Austyn Garcia, recap our November portfolio meeting, discussing what happened in the markets over the last month, our approach to traditional asset allocation (cash, fixed-income, equities, and alternatives), and our general outlook for the next 6-12 months in the markets.