Investing in stocks is like farming. There is a time to reap and then there’s a time to sow. It’s a great hobby to partake in if you have patience. That’s why the stock market is not the best place to keep your emergency funds. It’s the same reason why your personal home should not be viewed as an investment. The housing market has ups and downs just like the stock market. When the housing market is hot then that’s the time to sell high and when it’s low that’s the time to buy at a bargain price, but life is not going to wait until the housing market is hot for that promotion to occur that’s going to require you to move across the country or for some tragedy to befall your love ones that will require you to move closer to home help take care of your family.
It’s the same with emergencies. They don’t wait to happen when stocks are at all time highs. Also, when stocks are at recession lows you may not have extra income to take advantage of buying stocks at record lows. Of course it’s best to dollar cost average and hold stocks forever and also have a good emergency fund that will prevent you from selling down your portfolio, but life happens. Sometimes you have to sell down your portfolio. Its generally best to sell down a portion of your portfolio and it may be 5, 10 or even 20% of your portfolio, but its best to do this at market highs for an emergency or diversification scenario Instead of taking out a loan. But try not to sell down any portion of your portfolio during a market crash. The only way to do that is by having a solid emergency fund. Having and maintaining an emergency fund is a prerequisite to investing.
Know When To Reap And When To Sow.
In farming or gardening you don’t uproot your flower or plants during the winter and put it under a sun lamp so it can bear fruit or look pretty year round. That’s because there is a season to sow and then a season of waiting and then a season to reap and then it starts all over again. During the winter your seed has been planted already and is germinating.
It’s the same with investing. Think of investing in a taxable account like growing a garden. It always starts with planting a seed. Then you have to water that seed and take care of it. The seed grows into a plant and it bears fruit or flowers. It yield dividends because some flowers will drop to the ground and develop into another plant over time. During the fall you may have to plant more seeds if you want more flowers next summer.
With investing the ultimate time to sow is during a bear market. Now you should be sowing seed every fall which with investing can be once a week, month, quarter or year, but when a bear comes and pushes all your seeds deeper into the ground it’s time to plant more than you usually do. There is also a time to reap. There is nothing wrong with taking some profits off the top during market all time highs or if the market is 5% away from a previous all time high. It probably would be best to only sell down 5-10% of your portfolio a year when the market is close to an all time high. The reason to sell down your portfolio is up to you. It can be used as a back up emergency fund that can only be accessed at market all time highs or it can be used as a way to help and make major purchases during market all time highs, but outside of that you should continue to contribute to the garden and plant seed regularly. It would also be reasonable to contribute/plant 4-6% of your portfolio a year, but the more the better especially in a bear market. For instance a $100K portfolio would have you contributing $4- $6K a year, but you could sell down a maximum of $10K a year, but only at market all time highs.