By now you have probably heard that the general mantra of the stock market is to "buy low and sell high", or sell higher at least. Before Stash, Investors had to factor in the cost of trading fees when determining wether or not to buy or sell a stock.
At one point these fees were as high as $10. So to buy and sell a stock would take $20 out of your money. And if you invested as little a $100 this translated into a 20% loss just from fees if the stock did nothing. You would need your investment to return 20% just to make up those fees at that cost structure.
This means that if you invested $100 in the market then you would need a return of 20% just to get back the money you're giving away on fees. The stock market appreciates on average about 7-10% per year. By that math it would take you over 2 years just to get enough of a return just to pay off the fees. This is why investing was always see as a rich persons game.
Today we have stash and for a low $1 a month fee you can buy and sell as many Stocks and ETFs as you desire. The Stash Guy is a long term investor. So when I put my money into a stock I am looking to hold it at least 6 months but realistically I invest with a 5 year horizon.
So before I pick a stock ask myself, how do I see this company performing over the next 5 years. That may sound ridiculous. But when you find a good company it is pretty easy not to worry about the money you have invested while it appreciates over that time.
Over the past 5 years Amazon, Netflix and Google have all returned +529%, +710%, and +139% respectively. That means you would have 2x - 7x your money over that time frame with these stocks. Now obviously those awesome great stock returns and you might argue that you as a beginner investor may not pick stocks that get that as good of a return.
If you chose the ‘Match The Market’ Stash ETF your return would have been +72%. That’s an ~14.5% return each year. There is not a savings account that could have given you as good a return over that time frame.
There is another way to get even more bang for your buck. If you invested an initial $100 in the ‘Match the Market’ STASH ETF and added $25 to it every month your return over 5 years would be $2,980.46. Over that same time stash would have cost you about $60 in fees. That’s a pretty good return.
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Now we get to the important part, How do we know when to sell a stock?
As a long term investor there are usually only 2 reasons that I typically sell a stock.
I no longer believe in the company
In my post about how to choose a stock/ETF to invest in we recommend coming up with a thesis on why you want to own this stock.
Example: You may haven chosen to buy Facebook because you use Facebook or Instagram everyday and you trust the company with your data so you wanted to invest in what you know. Then the scandal about Facebook leaking customer data drops and you decide that you can no longer invest with Facebook over the next five years with good conscience. This is a moral reason to sell the stock and thats is your choice as an investor.
A technical reason that you may want to sell shares may be that you don’t see the company growing as much as you did previously. A good example of this is airplane manufacturer Boeing. They had been having a stellar performance over the past several years while you were invested in them. You now realize that a lot of their future orders for planes are set to come from China. You soon realize that with the stalled trade talks between The United States and China will cause their numbers to decrease over the next several years and they will make less money off of their planes. Therefore, you choose to sell the stock and develop a new 5 year plan for another stock. It is important to do an analysis of the stocks/ETFs you own twice a yer and determine whether you still want to own this stock for the next 5 years.
2. The stock or index has become too large a position of my portfolio.This often becomes the number one reason I sell any of my stocks or ETFs. In our guide on how to chose which stocks to invest in we recommend having a diversified portfolio. Consisting of a mix of at least 5-10 stocks and/or ETFs. Less than 5 and your portfolio will have erratic swings. More than five and your resources will be spread too thin. Now if you decide to own 5 stocks, then that means each stock is roughly worth 20% of your portfolio. Stash shows you this data on the investment page. If a stock has a great run then you may look to sell some of it to bring that percentage down closer to the average.
Example: My Stash portfolio is currently set up to compete with my wife in the Stash Couple’s Challenge. I recently had a great run in my Corporate Cannabis ETF. It became 25% of my portfolio after appreciating +27%. I own 8 stocks in my portfolio which gives an ideal weighting of about 12.5%. So I chose to sell approximately half of my Corporate Cannabis an reinvest in other long term bets with a lower weighting like Twitter. This moves assures that you sell higher and buy lower. Although Corporate Cannabis has had a stellar run there is a possibility that something could happen and it drops significantly. Also if it does keep running I still have skin in the game to reap some of those rewards as opposed to selling all of it.
Overtime you will develop your own feel for stocks especially if you take a long term view. After owning a stock for a couple years it starts to feel like one of your kids except that this one actually makes you money instead of taking all of it. Using these rules helps to take your emotions out of the game as much as possible.
This post is designed for individuals who either invest using the Stash app or are looking to invest. You may observe differences when applied to other investing platforms.
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