What If…

By Brad Thomason, CPA​

​What if you have some stocks (or funds, or ETFS), sell them, and then the market goes up after that?
 
Well, you’ll likely experience a feeling of annoyance.  You are likely to view those gains as being gains that are rightfully yours and could have been yours, save for the fact that you chose to walk away.
 
Those would be perfectly typical, and perfectly understandable thoughts to have.
 
But they wouldn’t necessarily mean you had made a mistake.  When you want the second milkshake but don’t drink (eat?) the second milkshake, nobody really views that as a screw-up.  Simply finding something attractive or desirable is not the ultimate arbiter of the question most of the time.
 
Sure you would want the gains.  Obviously.  But there are bigger questions at play, and it is those that determine how your decision should be graded.
 
For a long time I have made the argument that once people who are at or in retirement have enough money to drive the plan they’ve worked out, the justification for remaining exposed to the risks of the equity market becomes a lot harder to make.  The practical implication of putting this belief into action is that each person will make an individual decision about when to leave the market; and that the decision really won’t have anything to do with what’s going on in the market (an external measure) but rather what’s going on with that person’s balances (an internal measure).
 
Everyone who is in the market rises or falls, for the most part, with everyone else.  But the decisions of when to get in and get out are purely individual.  And that’s something we shouldn’t lose sight of.  You are only subject to the motions of the tide as long as you stay on the boat.  But nothing makes you get on or stay on the boat but your own decisions.
 
Still, I get it.  No one wants to miss out on something good that might happen.  But in the end I think it comes down to a couple of sober realizations that don’t displace that desire, but which certainly exist right alongside it.  The first is that once you have what you need to win, you really need to think differently about the prospects of losing it.  Losses matter more to those who have more to lose; and if you have a fully-endowed retirement plan, then one could argue you have everything (at least financially speaking). 
 
Investment market risk is something we often don’t have any choice but to accept because without investment returns our savings alone won’t grow to the level they will need to to do the whole job of ongoing retirement income.  But once the need to grow goes away (because the target, plus a bit of overage perhaps, has been met), continuing to stay exposed to the risk starts to look more and more like gambling.
 
Second, everyone who exits equities is going to see them go higher at some point, anyway.  At least that’s the conclusion history points to.  Higher future market levels, for an exiting investor, are not an if, but a when.  If you know going in that sooner or later the market is going higher, and you won’t be there to participate (because it is no longer a justifiable risk), why does it matter if the price increase happens the day after you leave or a year later?
 
It really doesn’t, not mechanically.  It feels like it does.  But the timing of the increase is less important than the reality of the increase itself; and you already knew the increase was coming someday.  So why does the timing matter?
 
Anyway, while all of this makes perfect sense, if it was self-evident or easy there would be no need for people like me to write blogs about these complications.  Nor would I do so had I not encountered actual investors mentally wrestling with this exact set of concerns.  More than once.  A lot more than once.
 
Even though it may not be easy, please consider the notion that the question of whether to scale back on stocks (or eliminate them altogether) changes as a person ages.  Early in life, it is more of a return on investment question.  But later it becomes more of an exposure to risk question.
 
At the point in time when it makes sense for you to walk away you are likely going to find it hard to actually do.  Your brain will know it’s right, but some other part of you will be trying to hold the status quo.  Part of that initiative will be based on the very real awareness that if you stay longer you may get more money.
 
But of course, you may participate in a drawdown, too.  And if you don’t have enough money in other places to cover the bills, you will have to liquidate stock holdings at a discount, making those losses permanent.  Which, back to the top, is why your brain knew it was time to go in the first place.  And why you probably ought to listen to your brain when it determines you have reached that point in your investment journey.    Irrespective of where the talking heads think the market is heading next.