Selling a security is something that investors ponder from time to time. Whether that security is an individual stock, a mutual fund, or an index fund, investors are left with the question of what to do with the proceeds.
No matter the reason for selling, it is important we have a well-thought plan for what we will do with the proceeds...before we pull the trigger.
Remaining in Cash
The default for selling securities is to remain in cash. Whether the markets are high or low, we may justify sitting in cash until the “uncertainty and tough times pass.” This logic relies on a significant (and incorrect) assumption – that there will be an all-clear signal that it is a good time to invest.
Sitting in cash may seem to be a comfortable and safe move, but it is fraught with uncertainties and long-term danger. When do we get back in? What if the market keeps moving higher? At what point do we realize that the train has left the station and we aren’t on board?
Investing in Another Security
We may sell a security with plans to invest in a different one. Sometimes we are influenced to buy a security that has been performing better than what we own. The question we must ask ourselves is: “What evidence do I have that the new security will perform better than the existing one?”
This is an important question to reflect and discuss with me. A lot of money has been lost because investors sold and bought at the wrong time. This happens with both novice and professional investors, including institutional managers.
In a study spanning 24 years, researchers analyzed the trading results of institutional money managers. They found that the stocks they sold subsequently outperformed the stocks they bought at a cost of over $170 billion. The abstract summarized, “Plan sponsors could have saved hundreds of billions of dollars in assets had they simply stayed the course.”1
Of course, there are occasions when selling a security makes sense. But that should only be after purposeful thought and a plan of “what’s next” is created. It is so easy to sell, and our emotions can sometimes get the best of us. But that why I am here. I am here to help ensure your decisions are thoughtful and in line with your plan.
©2022 The Behavioral Finance Network
- Scott Stewart, John Neumann, Christopher Knittel & Jeffrey Heisler, “Absence of Value: An Analysis of Investment Allocation Decisions by Institutional Plan Sponsors”, Financial Analysts Journal 65, no. 6 (2009)