: Making a decision on the best time to sell a stock is one of the most challenging and important tasks in the world. American investor well-known Nick MaggiulliRitholtz Wealth Management COO, he said there are three reasons to exit a position. Maggiulli, the popular finance blogger, spoke to ETMarkets. OfDollarsAndData.com, also talks about the philosophy of ‘You can keep buying’ on which his recently published book is based.
Here are some edited excerpts
Your book’s title, “Just Keep Buying”, sounds more like buying the dip or dollar cost averaging theory. Could you explain the difference, if there is one?
There are two basic definitions of dollar-cost averaging. The one I use is the purchase of assets over time, as you earn income to buy them. This is different from “Just Keep Buying”, because Just Keep Buying includes the psychological motivation. This is an aggressive investment approach that will allow you to automate your wealth building. It’s easier to remember and say than dollar cost averaging. The strategy of buying the dip, where one holds cash and hopes to buy when the market dips, is called buying the dip. This strategy can sometimes work, as I illustrate in the book.
You can keep buying), over the long run this strategy is a losing proposition.
Your book advises against investing in individual stocks. How does an average, but disciplined, retail investor outperform the index?
If they behave like professional stock pickers, the odds of them outperforming the index for five years are just 20-30%. Check out the SPIVA reports on various equity markets worldwide to see how you can verify this. Because I’m being conservative, I assume that retail investors have the same skills and resources than professionals. But we know this isn’t always the case.
How important do you attach to luck when investing? Is it a game that requires both skill and luck?
Luck is important, especially when it comes to how the markets perform over time. But, even with all this in mind, investing requires a lot of skill as there are many decisions that you must make to preserve your wealth over time. Many people believe they are investment geniuses, but they were lucky to be able to invest in 2022. It is not the market that you are skilled at, but when it is going down.
Exit strategies are not as often discussed, but buying strategies are. Do you have any thoughts about when the stock is right to be sold?
There are three reasons to sell stocks: (1) to rebalance; (2) to exit a loss-making position; or (3) to fund your life. Each of these is important and can be used at various points in your financial journey. You will likely need to rebalance your portfolio on an annual basis, and you will have to sell frequently to fund your retirement lifestyle. Although it is unlikely that you will ever be in a losing or concentrated position, it may be necessary to do so to reduce the risk in your investment portfolio.
What type of portfolio allocation do you recommend for an average investor in the midst of macro-related worries?
I recommend the one that suits you. The best one for you will be the one that suits your risk tolerance and financial situation. This portfolio consists of five per cent bonds and 85% income-producing risks assets. art, crypto, etc.). It would be different for someone else. This can be done using stocks and bonds only, or you could add REITs, farmland or other forms real estate. Find something that you can rest at night by doing your research.
Do you feel that one should be worried or greedy given the current market situation? Although the US market is in bear trap, there are still concerns that the worst might be coming.
Everyone never knows what’s next. I would not be greedy nor fearful. I’d just keep buying like I always have. Timing the market can be difficult, but it doesn’t mean you have to stop buying.
Are investors concerned about recession? Is this another ‘Just Continue Buying’ opportunity that investors should be concerned about?
Although I do not believe investors should be concerned, people should. Economic impacts are often worse than recessions. How that could affect your job, life, and other aspects of your life. Your livelihood is what you need to be concerned about, not your portfolio. Although markets may continue to fall, this could be an opportunity for investors younger than 50 to purchase more, I believe the economic effects of a recession will be far more significant for most people.
(The book ‘Just Keep Buying’, written by Nick Maggiulli, is published recently by Harper Collins in India)