Investing is like Football: You get Penalized for Holding

Bill Byrnes — Wed, 12 Dec 2007 12:35:00 -0600

If you get caught holding in football your team loses yards. If you get caught holding in your portfolio you lose money. There is no such thing as a hold investment. Yes, I know, every day hold recommendations are issued by Wall Street analysts but they’re copouts. Every investment recommendation that is not a buy is a sell, regardless of what label’s put on it. There are only two investment decisions: buy and sell. If you own a stock, bond, mutual fund, ETF, house, or car and don’t sell it, you’re making a buy decision. Why? Because you’re continuing to hold the asset and subjecting yourself to all the risk that comes along with it.

The buy/sell decision doesn’t mean you have to keep buying more of an asset but it does mean if you think an asset is fully priced, you should sell it. It’s okay to hold an investment you’d otherwise buy if you’ve reached your maximum hold size given risk tolerance levels or portfolio diversification considerations. Saying an asset is a good investment but its fully priced is really saying that it’s peaked in value and it’s time to sell.

There are two exceptions to the buy/sell rule for taxable investors. If you have a short term gain which will turn into a long term gain if your hold for a few more days – and the operative word is days – then it would be worth considering holding the investment. Holding may also be worth it if you’re approaching the end of one tax year and by holding for a few days you can push the gain into the following year. This one’s particularly relevant right now, since most of us are on a calendar tax year. There’s a knee jerk reaction to make investment decisions based on minimizing taxes. Minimizing taxes is good but what’s even better is maximizing your net worth. Calculate how much you’ll save in taxes if you’re holding for tax reasons, then calculate hold much – in most cases how little – the investment has to fall in value before you’ll have less money than if you sold it now and paid your taxes. I have no statistical proof, but I believe that most investors end up losing money by holding an investment in an attempt to avoid or minimize taxes.

Investors are emotional beings and we become attached to our investments. We don’t like to admit we’re wrong and sell a loser. It’s all too easy to hold an investment where we have a gain, in hopes of even greater profit, for too long. We need to accept that we don’t always pick “winners” and we’re not smart (lucky) enough to sell at the top. Investors also have a tendency to be on the lookout for new investments and become compliance about those they already own, particularly if they have a gain in them. We should place the greatest focus on our existing investments. The questions we need to ask ourselves are: is the investment consistent with my investment objectives and have my objectives changed? How will this investment perform given the current economic outlook? Has anything changed with the investment, the fund manager or the company’s prospects? Lastly, ask yourself if you didn’t own a particular investment, would you buy it today? If the answer is no, you know what you must do.

The MUTUALdecision Blog: Investing is like Football: You get Penalized for Holding

Investing is like Football: You get Penalized for Holding