: One of the most important and difficult tasks in the world of investing is making the call about when is the right time to sell a stock. Well-known American investor Nick Magiuli, who is also the COO of Ritholtz Wealth Management, said that there are three circumstances in which you should exit a position. In this interview with ETMarkets, Magiuli, who runs the popular financial blog OfDollarsAndData.com, also talks about the “Just Keep Buying” philosophy behind his recently published book.
At first glance, does the name of your book, Just Keep Buying, sound more like the theory of dollar cost averaging or buying the dip? Can you explain the difference, if any, between the three terms?
There are two main definitions of “dollar cost averaging”, but the one I use is buying assets over time while earning the income to buy them. The difference between this and Just Keep Buying is that Just Keep Buying has a built-in psychological motivation. It’s an aggressive investment approach that allows you to put your wealth on autopilot. It’s also much easier to say/remember than dollar cost averaging. Finally, buying a dip is a strategy where someone keeps money on the sidelines with the hope of buying when the markets enter a decline. Although this strategy works sometimes, as I illustrate in the book (
Just keep buying), in the long run this strategy is a losing proposition.
In your book, you advised against buying individual stocks. What do you think the chance of an average but skilled and disciplined retail investor outperforming the index?
Assuming they are similar to a professional stock picker, then their chances of beating the index over a five-year period are only 20-30 percent. You can check this by looking at SPIVA’s reports for various equity markets around the world. And this is conservative because I assume that the retail investor has the same skills and resources as the professionals. However, we know this is not always the case.
How much importance do you place on luck in investing? Is this a game of both luck and skill?
Luck matters a lot, especially how markets perform over a period of time. However, investing still requires a lot of skill because there are many decisions you need to make to preserve that wealth over time. For example, there are many people who thought they were investment geniuses until November 2021, only to realize that they were just lucky in 2022. You realize how much skill you have when the markets are going down, not when they are going up.
While buying strategies are often talked about, exit strategies are less discussed. Can you share your thoughts on how one should know when is the right time to sell stocks?
There are three times when you should sell stocks: (1) to rebalance, (2) to get out of a concentrated/losing position, or (3) to finance your lifestyle. I think they are all important in their own right and will be used at various times throughout your financial journey. For example, you’ll likely need to rebalance on an annual basis and you’ll need to sell regularly as you fund your retirement lifestyle. While exiting a concentrated/losing position should be rare, it may also need to be done to reduce risk in your investment portfolio.
With the macro concerns surrounding us, what type of portfolio allocation would you recommend to the average investor?
I would recommend one that works for you. This will be very specific to an individual, their risk tolerance and where they are in their financial life. For me, this is a portfolio of five percent bonds, 85 percent income-producing risk assets, and 10 percent alternatives (ie art, crypto, etc.). For someone else, it would be a different distribution. You can do this with just stocks and bonds, or you can add REITs, other forms of real estate, farmland, or whatever works for you. Do your research and find something where you can sleep at night.
Given the market situation, do you think one should be fearful or greedy? While the US market is already in the bearish grip, there are concerns that the worst may be ahead, not behind.
No one knows what will come next. Therefore I would not be greedy or fearful. I would just keep buying like I always do. Timing the market is tough, but getting rich doesn’t have to be.
Should investors be worried about the recession? Could this be another ‘Just keep buying’ opportunity?
I don’t think investors should worry, but people should. Recessions are usually worse because of their economic impact and how it can affect your life, work, etc. You shouldn’t worry about your portfolio, you should worry about your livelihood. Of course, if the markets continue to fall, it will probably be an opportunity to buy more, especially for younger investors, but I think the economic effects of the recession are much more important for most people.
(The book ‘Just Keep Buying’ written by Nick Maggiulli was recently published by Harper Collins in India)