"Don't Sell Equities When They're Down"

[TickTock]

I've been contemplating the idea of "don't sell equities when they're down" and I'm curious how folks implement this strategy.

DW and I are the traditional 60/40 target AA and rebalance once per year. This can lead to selling equities when they're down from a previous high and rebalancing into FI.

For example:

Start with 60/40 and a 4 WR (4% of initial portfolio), which is taken out at the start of the year and placed in a non-interest-bearing account (to make the math easier). Also to make the math easier, no spending increases for inflation will be taken when the portfolio is <100.

Year 1: Equity -30%, FI +5%. So, at the start of year 2 you have 42/37.8. At this point, traditional rebalancing shifts 5.9 from FI to equities to maintain the target AA.

Year 2: Equity +20%, FI +5%. So, at the start of year 3 you have 57.5/29.3. At this point, traditional rebalancing shifts 5.4 from equities to FI to maintain the target AA. BUT - equities are still down 16% from their previous high. Do you maintain the 66/34 AA?

And I'm sure there are a bunch of other ways to respond that I haven't thought of. How do you do it (or plan to do it)?

 

[TheWizard]

I don't generally sell from my portfolio but back when I did, I withdrew an amount monthly. Withdrawing from the overweight asset to come back closer to your target AA makes sense.

Maybe the definition of "down" needs some discussion. Most stock funds declined today; VOO is at 98.6% of its all-time high. So is it "up" or "down"? And compared to what or when?

 

[TickTock]

Maybe the definition of "down" needs some discussion. Most stock funds declined today; VOO is at 98.6% of its all-time high. So is it "up" or "down"? And compared to what or when?

Excellent insight!

 

[NW-Bound]

DW and I are the traditional 60/40 target AA and rebalance once per year. This can lead to selling equities when they're down from a previous high and rebalancing into FI.

The purists, once they decided to rebalance on a fixed day of the year, will do that no matter what the market is doing.

I do tactical AA, and buy/sell as I feel the market condition warrants it, so the above does not apply to me.

 

[TickTock]

I do tactical AA, and buy/sell as I feel the market condition warrants it, so the above does not apply to me.

I get that. Do you have rules, or is your rebalancing based on your feelings?

 

[RetiredHappy]

We don't rebalance and try not sell anything when the stock market is down. We have enough cash-like investments to pull from when we need money.

 

[OK EE]

My plan (and I haven't implemented this yet) is to draw maybe once or twice a year. That gives some flexibility as to when exactly to draw so you can pick an equity high day. I would consider anything where the major indexes are within 5% of their all time high to be high.

At the same time, you would rebalance your AA so that it stays constant.

For me, I plan on living off my brokerage account for a few years before switching to pretax accounts. My brokerage account is 100% AA because I want that to grow the fastest because the tax treatment is the best (aside from Roth which is also 100% AA). My pretax accounts I hold a 60/40 AA which translates to a 70% overall AA. One of the reasons I have my slowest growing assets in pretax accounts is because I want them growing slower due to RMDs, and I can trade without tax implications.

So what happens if I'm forced to sell in a down market? I will sell equities out of my brokerage account. Then I will rebalance my pretax accounts to get back to an overall 70/30 AA. That means I will sell bonds in my pretax accounts and buy equities. Those equities will regrow back to market highs eventually so I'm not really taking the loss. Only disadvantage is that shifts dollars from my brokerage to my pretax accounts which is less than ideal.

 

[RetMD21]

......

Start with 60/40 and a 4 WR (4% of initial portfolio), which is taken out at the start of the year and placed in a non-interest-bearing account (to make the math easier). Also to make the math easier, no spending increases for inflation will be taken when the portfolio is <100.

Year 1: Equity -30%, FI +5%. So, at the start of year 2 you have 42/37.8. At this point, traditional rebalancing shifts 5.9 from FI to equities to maintain the target AA.

Year 2: Equity +20%, FI +5%. So, at the start of year 3 you have 57.5/29.3. At this point, traditional rebalancing shifts 5.4 from equities to FI to maintain the target AA. BUT - equities are still down 16% from their previous high. Do you maintain the 66/34 AA?

And I'm sure there are a bunch of other ways to respond that I haven't thought of. How do you do it (or plan to do it)?

Can't you use contributions or withdrawals to rebalance?

 

[disneysteve]

What does "down" mean? If you bought a stock 20 years ago for $10/share, it reached a high of $100/share, and now sits at $90/share, you really aren't selling it when it's "down" if you unload it now. It's up $80/share from purchase.

 

[Al18]

When rebalancing, I think you should better define when to rebalance. If your desired allocation is 60/40, rebalance when the stock % is below 55% or above 65%.

Also, if you paid $20 for a stock 5-10 years ago and it’s currently trading at $14, I would definitely sell this loser.

 

[Chuckanut]

My rule is don't sell equities just because they are down. Sell them if there is a good reason to do so.

 

[TheWizard]

What does "down" mean? If you bought a stock 20 years ago for $10/share, it reached a high of $100/share, and now sits at $90/share, you really aren't selling it when it's "down" if you unload it now. It's up $80/share from purchase.

That touches on what I was getting at in #2.
I'm thinking "down" is likely to mean down X% from the recent high of that stock or fund, where X might be 5 or so.

What I originally paid for a security hardly matters. I have shares of VOO that I bought in my taxable account nine years ago that I will likely never sell, due to high CGs...

 

[oscar1]

Accumulate fixed income (bonds/cash/liquids) when markets are high (sell high) and use when markets are down (buy low). Fixed should carry you for 2-3 years although it has been a long time since we have had a prolonged down period more than a year. Warren Buffet always said "Be fearful when others are greedy and greedy when others are fearful". I am impressed with your AA discipline and rebalance strategy. Keep it up!

 

[Sunset]

I like to sell equities when they are at or within a couple of percent of their record high. Otherwise I don't rebalance but I have been adjusting my holding to contain more interest earning items, and less stock.

Getting ready for the big drop.

So now I'm around 71% equities overall .

 

[Dtail]

We have a set 5% band on either side when we rebalance. That is basically the buying/selling decision.

 

[Koolau]

Dangerously close to "dirty market timing" here.

 

[TickTock]

An interesting drift - certainly, "Don't sell equities when they're down" is a theme I've regularly seen on these boards. But if there's no consensus on what "down" means, how is this actionable/implemented?

Note: Rebalancing is not a necessary component of "Don't sell equities when they're down". It does, however, tend to buy at lower prices and help the portfolio when the recovery occurs.

 

[COcheesehead]

I don’t sell anything to fund expenses. I have a sufficient amount dedicated to income producing assets to more than cover regular expenses.

 

[TheWizard]

An interesting drift - certainly, "Don't sell equities when they're down" is a theme I've regularly seen on these boards. But if there's no consensus on what "down" means, how is this actionable/implemented?

I think it's a catch phrase used mainly by fraidycats and bucketeers.
I sold a small amount of tax-deferred equities EVERY MONTH from 2013 to 2020 while deferring SS to age 70.

It's entirely possible that a few of those 80+ months were "down" months, but it didn't matter...

 

[NW-Bound]

I get that. Do you have rules, or is your rebalancing based on your feelings?

I hold mostly individual stocks, plus some MFs that I have had for a few decades.

I generally neglect my MFs, which are now a small portion of my stash. Of the stocks, I sell/buy them based on their PE and future earning prospects. No hard rules here though. It depends on the market conditions.

When the market goes crazy on semi stocks like they have been doing recently, I lighten up on them and AI-related stocks, and start to buy more defensive stocks. However, I sell more than I buy, so my stock AA is now down to 52% compared to my normal AA of 75-85% stock.

 

[COcheesehead]

I think it's a catch phrase used mainly by fraidycats and bucketeers.

It’s called SORR

 

[SnowballCamper]

For me it's pretty simple. When I feel like doing something with my investments, there is only one thing I am allowed to do (at least with my TSP account, the govt employee's IRA). Rebalance to my fixed asset allocation among my four funds (G, C, S, and I). If stock funds are up relative to the previous rebalance, I am selling stocks at a high, and buying the other asset classes at relatively lower prices. If stocks are low, then I am buying them at a low, using the cash like G fund, or the other appreciated (less depreciated) stock funds ( C is large cap, S is small cap, and I is international). With this method I'm always buying low and selling high relative to my previous rebalance.

 

[Koolau]

Recently, most of my "selling" is because of RMDs. I can choose to sell stocks or GIF funds. GIFs never go down and stocks may go up or down. So I can choose, based on the markets at the time.

 

[rjsos5]

For me, I rebalance via how I direct new monies investment, e..g. into fixed or equities. Also I have a fat bucket one which will be replenished with MM or CDs. Could also toggle off for some investments the reinvest dividends and cap gains, funnel into core too. Though still few years away, I imagine that rebalancing and refilliing bucket one can also be facilitated via what to sell for RMDs. In terms of other selling for tax loss harvesting, (nice way of rationalizing losses), it is mainly around the edges for largely invest in broad based equity funds but not just indexes, and most fixed investments safe and hold typically till matures or called-so don't sell typically. But did get sucked into some stupid stuff in the past for which at least made nice tax loss harvesting candidates. Dabbled with other approaches in past, but with the above simple approach over time very content with results which I compare to most applicable benchmark. Am roughly 60/40 equity:fixed.

 

[SteveTX]

Something I very loosely try to follow (unfortunately or not, absolute strategy adherence isn’t really in my DNA):

If the market is down 10% from its last all time high, rebalance to your desired allocation. When down 20% from all time high, rebalance again. If it falls from there, do nothing, and sit on your hands, especially if it is below the 200 dma (or sell some if you’re into market timing). Once it crosses above the 200dma, rebalance or over rebalance as desired.