Just because stock market is up and hitting new all time highs everyday doesn’t always mean it’s time to sell. A good rule of thumb is to sell when all of the four criteria listed below have been met.
1. You need money. Likely a 5 to 6 figure amount or some amount that you don’t have in your emergency fund.
2. Stocks are doing well and close to all time highs
3. You have long term capital gains.
4. The needed funds is not easily accessible by any other means. You don’t have it in your emergency fund and can’t sell any unneeded items to generate the cash or work a part time job or side gig.
Stocks should only be sold when all of the above criteria are met. So are you saying the stars have to align perfectly for stocks to be sold from your taxable account? No. The number one item that must be met is long term capital gains. Not capital losses, or short term capital gains, but long term capital gains. The reason for all the other rules is that stocks should be held for a minimum of 5 years, but preferable 10 to 15. I know it sounds like a life sentence, but this will allow compounding to work and put you in the best position to have the most capital gains. Stocks should be sold once every 5 years.
You see, the money you have in your stock portfolio is not even real. It shouldn’t be viewed as actually money in the present. It’s the essence of money. It’s fluid and dynamic. It’s not static. It can be 100K this year and 50K next year and 150K the year after that. The stock market should not be viewed as a fixed point in time. It’s fluid. It represents potential energy. Stored energy that doubles on average every 10 years. Your portfolio shouldn’t be viewed as a moose head mantled onto the wall. It’s not a trophy to brag about and showcase. It’s not for performance chasing or to get in with the FOMO crowd. It’s something that’s is fired/used when the potential energy is high enough. The longer the investment horizon the higher the energy due to compounding interest. Hence its best to ignore your portfolio. Especially if you’re invested in index funds.
When it comes to index funds it’s best to invest in a diversified portfolio of index funds. Large cap blend stocks like the S&P 500 is great, but a more diversified group of index funds would be Paul Merriman’s four fund combo. It includes a large cap blend fund, large cap value fund, small cap blend fund and small cap value fund. This can help even out your returns when one sector of the market performs poorly, like the tech stock crash of 2000.
If you want to get even more diversified check out the ultimate buy and hold portfolio. It adds international funds and even a REIT fund for tax advantage portfolios.
I hope this post helps. This question of when to sell was a question that I searched high and low when I began my investing journey. No one could give me an answer, so I decided to write this post to give my own answer to this question. Happy Investing.