People often consider trimming or eliminating the stock portion of their portfolio under one of the following three situations:
Situation One: The most common stock-selling activity which most people engage in comes as the result of periodic rebalancing. During periods when stocks are gaining at a faster rate than the other portfolio components, it is necessary to periodically sell part of the stock holdings and invest the proceeds back into the other allocations to keep the percentages aligned with plan amounts. The interval for this type of activity varies widely from one investor to another. Many personal investment advisors recommend to their clients that they do this annually (which is probably too infrequent); whereas many institutions carry out rebalancing on a weekly or even daily basis.
Situation Two: A temporary sale of stocks in anticipation of a major market drop. This tactic is more often seen in the institutional space. Endowment portfolios often scale back stock holdings significantly when prices fall below the 10 month moving average price. They choose this marker because it triggers infrequently, and usually only in times of a true correction.
The sale doesn’t take place because they intend to permanently out of stocks. Rather, they are side-stepping a likely drop with the intention of buying back in at a later point and catching the recovery. When executed properly, this move leads to positive returns during a period which would otherwise been flat as they rode the decline down and back up the other side. Mechanically, they end the period with a greater number of shares; and in so doing have a more valuable investment.
Situation Three: Many retirees believe (we think rightly) that the case for owning stocks at all gets a lot weaker once they get to the point that they have enough money to live the life they want to live. At this point, preserving and using what’s been accumulated becomes far more important than trying to heroically get a lot of extra. So they sell their stock holdings en masse to reallocate the capital to safer investments or those with less chaotic value behavior. As it becomes more important to protect what’s yours, and have a predictable sense of return levels from one year to the next, the stock market becomes a less-suitable investment proposition. In respect of this, those entering or already in retirement often transition these holdings into a diversified portfolio of alternatives and non-market investments. They thank the market for what it did for them as they built their nest egg, and then permanently decamp in order to protect it.