Weekend Reading: Sell or Hold Edition
When faced with an investment that has substantially increased in value one of the hardest decisions investors have to make is whether to sell or hold. A reader of behavioural psychologist Dan Ariely’s blog asked this question about an investment he made in bitcoin that had increased in value by an incredible 4,000%. He wanted to know if he should sell his bitcoins and lock in the gain, or hold onto them in hopes of a further increase.
Dan replied back with a question of his own: Would you buy these bitcoins now, at their current price? He said if the answer is yes, you should hold onto your investment and maybe even buy more. But if the answer is no, it means that you don’t think the expected increase in value is worth the risk, and you should sell.
He said the more general point is that our investment decisions should be about what we think the future will hold, and we need to work hard to overcome the influences of our past actions. No matter what you purchased a given investment for, and regardless of what it is worth now, you should make your decisions only about where you think this investment is headed.
Ariely closed with this bit of wisdom:
“If you do decide to sell your bitcoins, don’t look up their value afterward. Yes, if the value drops, you’d be a bit happier that you sold, but if the value rose, your misery would be much higher—so resist the urge to check.”
This week’s recap:
On Monday I wrote about filing taxes using free software, a costly accountant, or something in between.
On Wednesday Marie explained the pitfalls of buying and managing a rental property.
And on Friday I looked at how the Air Miles expiry policy will affect your reward miles balance by the end of this year.
Weekend Reading:
I don’t normally share financial makeover stories but this one about a 59-year-old BC woman who is set to retire in a few months is worth a read.
Another worthy read looks at how bad life can get when divorcees try to retire. Especially when they’re women.
Wealthsimple took a long look at the TSX and uncovered some interesting data about the companies that make up Canada’s top stock exchange.
A Wealth of Common sense blogger Ben Carlson shares three examples from fellow bloggers who have busted common held beliefs about investing.
TSI Network’s Pat McKeough explains the risks and rewards of an RRSP-meltdown strategy.
Millionaire Teacher Andrew Hallam shows how to beat the S&P 500 index using the Dogs of the Dow approach.
Wealthing Like Rabbits author Robert Brown explains seven differences between TFSAs and RRSPs.
Travelling abroad and need to take out cash? Preet Banerjee has a great explanation of how much it will cost you.
A political blogger says the Canadian Revenue Agency is rotten to the core and it’s time to clean house.
If you hate spending money, you might suffer from Chrometophobia – or a fear of money.
Here’s how five Millennial bloggers think about money.
Career paths are not a straight line and, as experts will remind you, ‘no career decision is fatal’.
My Own Advisor explores some potential portfolio structures and withdrawal strategies in retirement.
Finally, Michael James on Money wonders whether it’s fair that someone who worked and contributed to CPP for 43 years gets the same benefit as someone who takes advantage of CPP’s 7-year drop-out provision.
Have a great weekend, everyone!
This is a nice example of the insightful, subtle, and (above all) useful financial information and advice we’ve come to expect from boomer&echo’s fee-for-service. Not only sometimes seriously epiphany-inducing, but comprehensive and spookily timely (and all for a very reasonable price).
You can’t go wrong; hire them!
Thanks, guys!
Hi Brian, thanks so much for the kind words. Your support means a lot to us!
“…our investment decisions should be about what we think the future will hold”
I disagree completely — that’s the worst thing to do!
Assess your risk tolerance, make a plan and stick to it, because no one knows what the market will do.
@Gkatch22 – I think you have to look at that comment in relation to a single stock or speculative investment (such as bitcoin). How many times have you heard an investor say that he or she is just going to hang onto a stock “until it comes back”?
Ariely is saying that what matters most is today’s price, not how much you paid for it in the past. If you think it is still a good investment then you would want to hold or buy more.
But if your $10,000 investment in Canadian Oil Sands is only worth $6,000 today, your decision to buy, sell, or hold should be based on what you think its future will hold. What has a better chance of getting your $6,000 back to $10,000? Holding onto Canadian Oil Sands? Or selling it, taking your $6,000, and investing it in something you believe has better future prospects?
Your comment about making a plan and sticking to it means that you have a positive view of the future of stocks markets over the very long term (a correct assessment). So even if your investments have significantly increased in value you will continue to stay invested because the stock market is the best place to park long term savings if you hope to gain purchasing power over inflation.
That’s one reason why I switched from individual stock picking to indexing. I had a hard time determining the future prospects of one individual company over another. Now that I own thousands of stocks from around the globe with just two ETFs, I’m betting on the future of the global economy rather than tying my fortune to a few hand-picked Canadian companies.
I think the investor should never have invested in Bitcoin in the first place. But given that he did, I like Ariely’s advice. I said the same thing to a colleague 17 years ago about stock options in our employer’s stock. He immediately sold everything which turned out very well for him. Thanks for the mention.
Hi Michael, that’s good advice you gave to your colleague. I remember Mark Goodfield writing about something similar with a client of his.
And 17 years ago?!? You might have been at the forefront of behavioural finance!
I’m sure I got the idea from someone else. Many ideas that seem new are just reinvented.
On the sell or hold question, in our household’s RRSP and TFSA accounts, we are fully into passive indexing, but in our taxable joint account, we still have several individual stock positions. My approach to the stocks has been to set a maximum value threshold, and at that point sell off a portion, using the proceeds to adjust the balance toward my desired allocation. Given it is a taxable account, I don’t want to trigger an overly large capital gain, but this seems to work for me. Some stocks have continued to rise and I have sold off chunks multiple times over several years. Others are a little more volatile and after taking profits a few times, the current position is now worth less than its cost. At this point, I’m debating selling the entire position and along with a corresponding profitable position so that the loss in one will offset the gain in the other.
Hi Russ, thanks for sharing. The situation you described is an example of why it’s so difficult to follow financial rules of thumb. In a taxable account you have to consider capital gains and losses, along with your personal tax situation. I think you’re taking the right approach – eating the elephant one bite at a time, so to speak – and offsetting a losing position with one of your winners makes a lot of sense.
Thanks for the blog post mention Robb! 🙂
My pleasure, Jessica – thank you for the great content! I didn’t know Chrometophobia was a thing, but I’m sure I have it (although my wife will likely still call it being cheap!).
Along the lines of what Gkatch22 and Michael James said, there is a downside to telling investors they should decide if they would buy at the current price. There is no guarantee that they are well-informed and can make an accurate decision. If they bought bitcoin knowing that it was a long shot, and now it’s turned out well, that doesn’t make them an expert on it. I think that’s the real question.
That leads to the same conclusion in this instance. If you have no idea what’s going to happen next and you’ve already made a lot of money it’s better to make sure you keep it. You don’t need to know anything about the specific investment, just that exceptional performance is unlikely to keep repeating itself in any situation.
I’m facing a similar question. A few years ago I invested a small amount in a fund that promised fixed returns that were higher than bond yields at the time. It has delivered those returns consistently so it might seem like a good investment. However the end of the term is coming up and I’m going to drop it. In this case it’s because I don’t want to do the work to really understand it given the small part it plays in my plan.
It’s not a question of whether I believe it’s a good investment now (I just looked up the 5-year returns for XBB and they’re nearly identical, so it hasn’t really outperformed). The more important decision is whether it’s even worth asking that question.
Never liked the idea of the RRSP-meltdown approach. I figure the best (and easiest) way to reduce my tax burden with the RRSP assets is to simply make withdrawals in the lowest-possible income years.
There is beauty in simplicity.
(Yes, I know, this is why you index Robb) 🙂
Thanks for the mention and support my friend,
Mark