When is the right time to sell a stock? American investor Nick Maggiulli explains

New Delhi
: One of the most important and difficult tasks in the world of investing is to take a call on when is the right time to sell a stock. Well-known American investor Nick Maggiulli, who is also the COO at Ritholtz Wealth Management, said that there are three circumstances under which you should exit a position. In this interview with ETMarkets, Maggiulli, who runs the famous finance blog OfDollarsAndData.com, also talks about the philosophy of ‘Just Keep Buying’ on which his recently published book is based.

Edited excerpts:

On the face of it, the name of your book ‘Just Keep Buying’ sounds more like the theory of dollar cost averaging or buying the dip? Can you explain the difference between the three terms, if any?

There are two main definitions for “dollar-cost averaging”, but the one I use is the purchasing of assets over time as you earn income to buy them. The difference between this and “Just Keep Buying” is that Just Keep Buying has the psychological motivation built in. It’s an aggressive investment approach that allows you to put your wealth building on autopilot. It’s also much easier to say/remember than dollar-cost averaging. Lastly, buying the dip is a strategy where someone holds cash on the sidelines in hopes of buying when markets enter a dip. Though this strategy works sometimes, as I illustrated in the book (
Just Keep Buying), over the long run this strategy is a losing proposition.

In your book, you have advised against buying individual stocks. What is the chance of an average but skilled and disciplined retail investor, according to you, to outperform the index?

Assuming they are similar to a professional stock picker, then the chances of them outperforming the index over a five-year period are only 20-30 per cent. You can check this by reviewing the SPIVA reports for various equity markets across the globe. And this is being conservative, because I am assuming that a retail investor has the same skills and resources as the professionals. However, we know this is not always the case.

How much importance do you give to luck in investing? Is it a game of both luck as well as skill?

Luck matters a lot, in particular how the markets do over a given period of time. However, despite this, investing still has lots of skill because there are many decisions you have to make to keep that wealth over time. For example, there are a lot of people who thought they were investment geniuses through Nov 2021, only to realize that they were just lucky in 2022. You realize how much skill you have when markets are going down, not when they are going up.

While buying strategies are often talked about, exit strategies are less discussed. Can you share your thoughts on how one should figure out when is the right time to sell a stock?

There are three times when you should sell a stock: (1) to rebalance, (2) to exit a concentrated/losing position, or (3) to fund your lifestyle. I think all of these are important in their own right and will be utilized at different points throughout your financial journey. For example, you will probably need to rebalance on an annual basis and you will need to sell regularly when funding your lifestyle in retirement. While getting out of a concentrated/losing position should be rare, this may also need to be done to reduce risk in your investment portfolio.

Amid the macro worries surrounding us, what type of portfolio allocation would you recommend to an average investor?

I would recommend one that works for you. That’s going to be very specific to an individual, their risk tolerance, and where they are in their financial life. For me, that’s a portfolio of five per cent bonds, 85% income-producing risk assets, and 10 per cent in alternatives (i.e. art, crypto, etc.). For someone else that would be a different allocation. You can do this with just stocks and bonds, or you can add REITs, other forms of real estate, farmland, or whatever works for you. Do your research and find something where you can sleep at night.

Given the market situation, do you think one should be fearful or greedy? While the US market is already in bear grip, there are concerns that the worst may be ahead of us and not behind.

No one knows what will come next. Therefore, I wouldn’t be greedy or fearful. I’d Just Keep Buying like I always do. Timing the market is hard, but getting rich doesn’t have to be.

Should investors be bothered about recession? Can that turn out to be another ‘Just Keep Buying’ opportunity?

I don’t think investors need to be worried, but people do. Recessions are usually worse due to their economic impacts and how that might affect your life, job, etc. It’s not your portfolio that you should worry about, but your livelihood. Of course, if markets continue to fall this is likely to be an opportunity to buy more, especially for younger investors, but I think the economic impacts of a recession are far more important for most people.

(The book ‘Just Keep Buying’, written by Nick Maggiulli, is published recently by Harper Collins in India)

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