- Hi, I'm Jarrad, and I have a confession.
(Jarrad inhales deeply)
I sold all of my stocks,
but we'll talk more about that in just a minute.
How do you know when to sell your stocks?
Do you go off of gut feeling?
Do you sell when they're up
to take some profits off the table
or do you sell when they're down to cut your losses?
Because that sucker is never coming back.
The answer to that is a lot simpler,
as well as a lot more complicated than you think
and I'll show you what I mean.
This is an age-old question.
If we asked 1,000 different people,
we'd probably get 1,000 different combinations of answers,
but let's see what the experts suggest,
and then I'll tell you why I didn't follow any of the rules
that these guys laid out.
If we asked an investing legend like Warren Buffett,
we'd get these two answers.
You would sell when a better,
more attractive opportunity came along.
He said, "We would sell if we needed money
for something else.
I would reluctantly sell something terribly cheap
to buy something even cheaper."
Keep in mind that he said,
"If we needed money for something else,"
which implies that he'd only do this
if he didn't have the extra cash on hand
to purchase that cheaper investment.
The second reason would be
if the underlying fundamentals changed within a business
or if something within the business landscape had changed.
He said, "That doesn't mean that we think the company
is going to miss some disastrous periods,
or anything like that.
We think McDonald's has a fine future,
we think Disney has a fine future, and there are others,
but we don't think their competitive advantage
is as strong as we thought it was
when we initially made the decision."
So, how is my old man voice there?
Because I've won many awards with that voice over the years.
Let me know in the comments
where you'd rate that on a scale of one to 10.
When you invest into real businesses,
things can always change.
If you've sunk a ton of money into a stock,
then it can be even more difficult to sell when it's down
because you've already made a huge commitment.
This triggers an emotional bias called the endowment effect.
It's when an individual
tends to irrationally value something higher
because they already own it.
Another legendary investor, Howard Marks of Oaktree Capital
noted in one of his memos
when it doesn't make sense to sell.
He said, "There certainly are good reasons for selling,
but they have nothing to do
with the fear of making mistakes,
experiencing regret, and looking bad.
Rather, these reasons should be based
on the outlook for the investment,
not the psyche of the investor,
and they have to be identified through hardheaded
financial analysis, rigor, and discipline."
Howard also mentioned in the same memo
that most of the portfolio decisions investors make
are relative choices.
There can't possibly be a hard and fast rule
because why, when, how, and many other variables
are relative to you and no one else.
Although he mentioned that relative considerations
should play an enormous part in any decision to sell,
"If your investment thesis
seems less valid than it did previously
and/or the probability
that it will prove accurate has declined,
selling some or all of the holdings
is probably appropriate.
Likewise, if another investment comes along
that appears to have more promise
to offer a superior risk-adjusted prospective return,
it's reasonable to reduce or eliminate existing holdings
to make room for it."
I know we hear that a buy-and-hold strategy
is the best way to invest,
but that's not always the case
according to another investing legend, Jack Bogle.
- Buy and hold for a stock is one thing.
Buy and hold the US stock market is quite a different one.
You know, what do we have going for in the US stock market?
Leave aside how hard it is to pick the winners,
how few people really ever heard of Amazon 25 years ago,
and to say nothing of Google,
maybe a little more than that, maybe 30 years ago.
So if you hold the stock market,
you will, not to be corny, Bill,
but you will grow with America.
- It's tough to blindly say buy and hold
to the guy who bought Roku stock at the top
and is now down 78 plus percent,
even though nothing has really changed
about this innovative company
that allows consumers to stream content
to their televisions.
Now that that price has dropped by so much,
it doesn't really look very much like
an innovation stock now, does it?
Things can change within an individual stock very quickly
and you can get burned very easily
if you're not paying attention.
Think of getting burned investing at some point
as just a part of this gambling game
that we're all playing by investing in the stock market.
Look at it like paying for an education
that you didn't know you needed.
It hurts just enough
to force you to become a better investor over the long-term.
While no one actually enjoys the feeling,
it's probably the best way to learn the investing style
that works well for you.
The longer you invest
in different market cycles you go through,
the more you'll realize about yourself as an investor.
Why you invested the way you do
over the next five, 10, 20, and 30 years
will probably change.
A 22-year-old person watching YouTube videos
and YOLOing on SPEC stocks
most likely isn't going to be doing the same thing
when he is 37,
with a significant other and a couple of kids.
Just like smashing beer cans on your head
or partaking in mosh pits at metal concerts
in your younger years worked back then,
those actions don't age very well as you get older.
I look at investing like a scale that you slide across
at different times of your life.
At first, you wanna play around with all of the toys:
active investing, passive investing, growth, value,
dividend, options, commodities, day trading,
and the random cryptocurrency
that your friend's cousin's sister's boyfriend
is schilling to you.
As time goes on, you'll start to narrow in
on a few different strategies that work well
or specific investor psychology.
The most important thing to focus on
is having a process that you believe in,
follow, and stick to.
The people who lose the most money
are the ones playing patty-cake
by veering away from their strategy
when their portfolio isn't beating the market
in the short-term.
Okay, back to why I sold all of my individual stocks
towards the end of 2020 at the very top of the market
and put all of my money into low-cost index funds.
Before I tell you about that,
please hit that thumbs up button
to help support my dog, Molly.
What it comes down to is I'm basically a genius
for selling at the top.
So you should, of course, buy my course on how to do that.
It's called The Toe Tapping Investor:
How to Time the Market and Brag About It on the Internet.
Just kidding, I don't have a course to sell,
and I'm definitely not a genius.
I was pretty much just lucky.
The reason I sold my individual stocks
and moved all of that money into low-cost index funds
is because I asked myself one simple question,
"Why am I investing this way?"
That's a dumb question
because the default answer most of us have
is to make a lot of money maximizing returns.
But for me, I'm not really interested
in maximizing my returns at all costs.
I know that makes me sound like a crazy person
who just ate a handful of magic mushrooms,
so let me explain.
We have this inherent urge
to make the most money investing as quickly as possible
because that's how you become wealthy.
If you're not trying to beat the market,
then you're basically just a loser
who's going to stay broke for the rest of your life.
To do that though,
you have to tilt your portfolio in different directions
to gain an edge.
Whether that's picking specific sector funds,
actively managed funds,
picking individual stocks, or whatever.
You cannot beat the market and maximize returns
without doing more than just investing
in super lame, low-cost index funds.
I don't blame most people for having this mentality, either.
We look at everyone around us
and find the handful of people
who are doing way better than us financially
and measure our money's success to theirs.
After investing for years and years,
one thing I realized about my investing behavior
is that I don't have enough conviction
to hold specific stocks or funds
that have the potential to outperform the market.
Not only do I lack that conviction,
but I'm not willing to bet my hard-earned money
and financial future
on the fact that I'm a good-enough investor
to beat the market.
In my opinion, the stock market
is basically an insane asylum in the short-term,
where the inmates are running the show.
I've accepted the fact that I'm not willing
to play that beat-the-market game in the stock market,
which means that I'm perfectly fine with being average
when it comes to my investing returns.
Choosing which game you wanna play
will determine how you'll be investing your money.
The game I am playing
is the game of get rich slowly in the stock market.
It goes against human nature
to intentionally do anything slowly,
but I'm a weirdo in multiple areas of my life,
so we can just add this one to the long list.
To me, the biggest risks
are the ones that we can't even imagine happening.
Because of that, I need to build a portfolio for myself
from the very start that I'm able to hold onto
when those really, really weird times come along.
As much as we all wanna shut our eyes
and ignore the downsides,
that day is coming.
And since I'm still a pretty young guy,
there should be at least a handful of unimaginable events
between now and when I eventually least stop investing.
But that portfolio also needs to be able to be held
during the good times
when I'm sitting there watching everyone else around me
outperform my portfolio.
I've come to the conclusion
that holding dorky index funds
is what gives me the ability to hold on
during the good times and the bad times.
I also enjoy going this route as well
because when people are making money hand over fist,
that tells me there's a lot of speculation going on.
It gives me the ability to sit back and relax,
while I watch people trade in and out of investments
chasing alpha like a bunch of chickens
with their heads cut off.
If this is you, then I am not hating on you,
but I, for sure, don't have the nuts
to chase that potential one to 2% extra return
by investing outside of my boring portfolio.
Essentialism is the name of the game
when it comes to how I've built my investment portfolio.
The disciplined pursuit of less.
It's also the name of a really good book
that I revisit every year as a constant reminder.
I highly recommend it.
By taking the one decision to only invest in index funds,
I immediately remove a thousand other decisions
later down the line.
I can skip paying attention to the current stock market news
for an extended period of time
because none of that applies
to a buy-and-hold index fund investor like me.
I never have to decide
whether I should or shouldn't buy a stock, sell a stock,
buy more of one that I already own,
rotate into another sector, asset class,
and just about any other decision
every other active investor makes.
My default is to dollar-cost average
into the same index funds at the same allocation
like clockwork.
There isn't a "Yes," "No," "Maybe,"
or, "Let me think about that," conversation
going on in my head.
The book "Essentialism" phrases it perfectly.
"One strategic choice
that eliminates a universe of other options
and maps out a course for the next five, 10,
or even 20 years of your life."
If I can reduce the number of decisions that I have to make,
then that reduces my chances
of making really dumb, irrational moves
with my money investing.
Less decisions also leads to more time on my hands
to do other things.
There is too much time involved
in properly managing a portfolio full of individual stocks
and a bunch of funds.
This is very rarely talked about in the investing space
and it blows my mind.
We are all just playing this big game
of what we do with the 24 hours
that are allotted to each of us every single day.
Spending a couple of hours per week
looking over and managing my portfolio
isn't guaranteed to increase my investment returns.
It's not like a normal skill
where if you spend more time on it,
you'll most likely improve in that area.
Spend that three hours per week on your physical health,
there is a 100% chance
you are going to improve how you look and feel.
Spend that three hours per week
on organizing and decluttering your home,
there is a 100% you'll own less unnecessary items
and feel better in your daily environment.
Spend that three hours per week on learning a new skill
that'll increase your income by $10,000 per year,
there is a 100% chance you are going
to improve in that skill and make more money.
My time and most other people's time
is way better served at doing more productive things
that are going to have a bigger impact on our lives.
In the book "On the Shortness of Life,"
Seneca said, "People are frugal
in guarding their personal property,
but as soon as it comes to squandering time,
they are most wasteful of the one thing
in which it is right to be stingy."
The best investment portfolio to use
if you want a more passive strategy
is the two or three-funded portfolio,
and you can watch videos to your left next.
Please hit that thumbs up button before you go
and check out the description
for more helpful resources and free stocks.
I'll see you in the next one, friends, done.