18. When Should You Sell?

On rebalancing, concentrated positions, and the purpose of investing

DESPITE OUR INVESTING philosophy to Just Keep Buying, there will inevitably come a point in your investment journey when you will need to sell. Unfortunately, choosing when to sell can be one of the most difficult decisions you ever make as an investor.


Because selling forces you to face off against two of the strongest behavioral biases in the investment world—fear of missing out on the upside and the fear of losing money on the downside. This emotional vice can make you question every investment decision that you make.

To avoid this mental turmoil, you should come up with a set of conditions under which you would sell beforehand instead of relying on your emotional state when you are thinking of getting out of a position. This will allow you to sell your investments on your own terms, to a predefined plan.

After coming up with a list of reasons myself, I can only find three cases under which you should consider selling an investment:

1. To rebalance.

2. To get out of a concentrated (or losing) position.

3. To meet your financial needs.

If you aren’t rebalancing your portfolio, getting out of a concentrated (or losing) position, or trying to meet a financial need, then I see no reason to sell an investment—ever.

I say this because selling can have tax consequences, which is something we should avoid as much as possible. But before we dig into this and the three conditions listed above, let’s discuss the overarching strategy as to when you should sell an investment.

Sell Right Away or Over Time?

In chapter 13 we examined why it’s usually better to buy immediately rather than over time. The reasoning was simple: since most markets go up most of the time, waiting to buy usually means losing out on upside.

When it comes to selling an asset, we can use the same set of reasoning, but come to the opposite conclusion. Since markets tend to go up over time, the optimal thing to do is to sell as late as possible. Therefore, selling over time (or as late as possible) is usually better than selling right away.

Of course, there are circumstances where you would be better off if you sold immediately, but if you have the option, waiting as long as possible before selling or averaging out of your position will typically net you more money.

In other words, buy quickly, but sell slowly.

I raise this point because it can help guide all your future timing decisions around buying and selling investments. Unfortunately, even with this framework, nowhere in investing is there more confusion around timing than when it comes to rebalancing.

As we saw above, rebalancing is one of the three times it’s acceptable to sell an investment. Let’s look at that now.

What’s Rebalancing Good for Anyways?

“Perfectly balanced, as all things should be.”

Not only is this one of the more popular lines from Thanos, the leading villain in the Marvel Cinematic Universe, but it also has some practical applications when it comes to managing your portfolio.

In chapter 11 we discussed what assets you should invest in—however, we never discussed how that mix of assets will change over time. The solution to this problem in the investment world is rebalancing.

As a reminder, when you first set up your portfolio it should be according to your target allocation (the mix of assets that you believe will reach your financial goals). For example, you might have a target allocation of 60% U.S. stocks and 40% U.S. bonds. If you invested $1,000, this means that $600 would be in U.S. stocks and $400 would be in U.S. bonds.

However, without rebalancing, your portfolio would drift from its target allocation to be dominated by its highest returning assets. For example, if we made a single investment into a 60/40 U.S. stock/bond portfolio and never rebalanced it over 30 years, it would be mostly stocks by the end of the period.

As you can see in the first plot, over the period from 1930–1960, a single investment into a 60/40 portfolio that was never rebalanced would end up holding 90% stocks after 30 years.

And it’s not just the 1930s that exhibit this either. If we extend this analysis to every 30-year period from 1926–2020, we see similar results.

The next plot shows the final percentage that is in stocks for a 60/40 U.S. stock/bond portfolio after 30 years for two different rebalancing strategies—one that rebalances annually and one that never rebalances.

As you can see, the Rebalance Annually strategy tends to have portfolios with about 60% stocks at the end of the 30-year period. This makes logical sense as this strategy rebalances its stock holdings back to 60% of the portfolio each year.

On the other hand, the Never Rebalance strategy tends to have portfolios that end up with 75%–95% in stocks after 30 years. This occurs because U.S. stocks tend to outperform U.S. bonds over longer periods of time. As a result, they take over the portfolio.

From this simple fact we can then infer that the portfolio that never rebalances generally outperforms the one that rebalances annually. Why? Because nearly every time you rebalance you usually end up selling a higher-growth asset (stocks) to buy a lower-growth asset (bonds). This process inherently detracts from your total return over time.

We can see this more clearly by comparing the growth of a $100 investment in the Rebalance Annually strategy versus the Never Rebalance strategy over 30 years. This is shown in the next plot.

This plot illustrates that, most of the time, rebalancing between a higher-growth asset and a lower-growth asset in your portfolio tends to lower overall performance. The major exception to this occurred from 1980–2010, where U.S. bonds performed well and U.S. stocks got hammered in the final decade (2000–2010).

Given that rebalancing doesn’t typically enhance returns, why do people still do it?

To reduce risk.

Rebalancing is all about controlling risk. If your target portfolio is a 60/40 U.S. stock/bond portfolio, without rebalancing you could end up moving towards a 75/25 portfolio or even a 95/5 portfolio within a few decades. As a result, your portfolio will have ended up taking on far more risk than you initially set out to take.

A simple illustration of this is considering the maximum drawdown of each of these strategies over a 30-year period. As a reminder, the maximum drawdown is the point at which the portfolio is down the most within a given period of time. So if you started with $100 and at your worst point were down to $30, that would be a maximum drawdown of 70%.

As the next plot illustrates, throughout most periods, never rebalancing leads to much larger drawdowns than a strategy that rebalances each year.

For example, if you had invested $100 in a 60/40 U.S. stock/bond portfolio in 1960 and never rebalanced it over 30 years, at its worst point your portfolio would be down by about 30% from its highest value. This is its maximum drawdown over the 30-year time frame and is represented in the plot above as the point on the gray line above 1960.

But, if you had rebalanced your portfolio each year back to its target allocation, you would have only seen a maximum decline of 25% instead. This is represented in the plot above as the point on the black line above 1960.

From this plot we can see that, most of the time, rebalancing reduces risk by shifting money from your higher-volatility assets (stocks) to your lower-volatility assets (bonds). However, during extended declines in equities (e.g., early 1930s and 1970s), it can do the opposite. In these instances, rebalancing actually increases volatility by selling bonds to buy stocks that continue to decline.

Though these circumstances are rare, they illustrate how periodic rebalancing is an imperfect solution to risk management. Nevertheless, I do recommend that most individual investors rebalance on some schedule. But figuring out the right schedule is the hard part.

How Often Should You Rebalance?

While I would love to give you the definitive answer on how often you should rebalance your portfolio, the truth is… no one knows. I’ve examined rebalancing periods ranging from once a month to once a year, yet I never been able to find a clear winner. Unfortunately, no rebalancing frequency consistently outperformed all the others.

Researchers at Vanguard came to a similar conclusion after analyzing the optimal rebalancing frequency for a 50/50 global stock/bond portfolio. Their paper states, “The risk-adjusted returns are not meaningfully different whether a portfolio is rebalanced monthly, quarterly, or annually; however, the number of rebalancing events and resulting costs increase significantly.”94

And though their analysis examined rebalancing between assets with different risk characteristics (e.g., stocks and bonds), the same logic also holds when rebalancing between assets with similar risk characteristics. For example, the famed financial writer William Bernstein concluded that, “No one rebalancing period dominates,” after examining rebalancing frequencies between pairs of global equities.95

All of these analyses illustrate the same thing—it doesn’t matter when you rebalance, just that you do it on some periodic basis. As a result, I recommend an annual rebalance for two reasons:

1. It takes less time.

2. It coincides with our annual tax season.

Both of these are important for different reasons.

First, taking less time to monitor your investments each year allows you to spend more time doing the things you enjoy. This is why I am not a fan of rebalancing based on tolerance bands. Tolerance band rebalancing is when you rebalance your portfolio after the allocation gets too far away from your target allocation.

For example, if your portfolio is 60% stocks with a 10% tolerance band, you would rebalance it back to 60% every time the stock allocation was above 70% or below 50%. This method works fine, but also requires more monitoring than a periodic rebalance.

Second, annual rebalancing is also ideal because you can do it when you make other tax-related financial decisions. For example, if you sold an investment that you owed capital gains taxes on, you might find it helpful to rebalance your overall portfolio at the same time to save yourself the extra effort.

Whatever you decide to do when it comes to rebalancing frequency, avoiding unnecessary taxation is a must. This is why I don’t recommend rebalancing frequently in your taxable accounts (i.e., brokerage account). Because every time you do, you have to pay Uncle Sam.

But what if we could rebalance without paying Uncle Sam? Is there a better way than selling?

A Better Way to Rebalance

While selling an asset to rebalance isn’t the worst thing in the world, there is a way to rebalance your portfolio that involves no tax consequences at all—Just Keep Buying. That’s right. You can buy your way back into a rebalanced portfolio. I call this an accumulation rebalance because you are rebalancing by buying your most underweight asset over time.

For example, imagine that your portfolio is currently 70% stocks and 30% bonds, but you really want it to be 60% stocks and 40% bonds. Instead of selling 10% of the stocks and buying 10% more in bonds, you would keep buying bonds until your allocation is back to 60/40.

Unfortunately, this method only works for those who are still in the accumulation phase of their investment journey. Once you can’t save anymore, you have to sell to rebalance.

I like the accumulation rebalance strategy because it can reduce how much your portfolio draws down during market crashes. By adding money over time, you are constantly offsetting losses that develop in your portfolio. For example, going back to our 60/40 portfolio simulations, if you added money consistently over 30 years, you would have seen a much smaller maximum drawdown in most periods compared to not adding money.

As the next plot illustrates, rebalancing while adding funds each month can reduce your maximum drawdown by as much as half in some cases. Once again, this plot shows the maximum decline in your portfolio over a 30-year time frame. However, in this case it compares one portfolio that never adds funds to one that adds funds every month for 30 years using an accumulation rebalance strategy.

In both of these simulations I rebalance annually, but by adding funds over time you would see your portfolio decline by less in percentage terms.

The only difficult thing about the accumulation rebalance strategy is that it becomes harder to pull off as your portfolio increases in size. While it’s easy to add money to rebalance your portfolio when it is small, as it gets bigger you may not have enough cash to keep up. In those instances, selling in your taxable account can make sense from a risk perspective. Just try not to do it too often.

Now that we have discussed why you might need to sell when it comes to rebalancing, let’s look at how to sell to get out of a concentrated (or losing) position.

Getting Out of a Concentrated (or Losing) Position

As I discussed in chapter 12, I am not a big fan of getting into concentrated positions in individual securities. However, sometimes life doesn’t give you a choice. For example, if you work at (or start) a company that provides equity compensation, you may one day find that a significant portion of your wealth is in a single security.

In this case, congratulations on your gains! However, you will probably want to sell at least a portion of this position down over time. How much should you sell? It depends on your goals.

For example, if you have mortgage debt and a large, concentrated position in one security, it may make sense to sell down enough of this security to pay off your mortgage. From a return perspective this is probably sub-optimal since your concentrated asset will probably rise in value more quickly than your home.

However, from a risk perspective this can make lots of sense. After all, while the future returns in your concentrated position are only a possibility, your future mortgage payments are guaranteed. Sometimes it’s better to trade maybes for certainties.

How exactly should you do this?

Find a selling methodology and stick to it. Whether that means selling 10% chunks every month (or every quarter), selling half and letting the rest ride, or selling most of it right away, find something that allows you to sleep at night. You can also sell based on price levels (on the upside and the downside) as well, as long as they are determined beforehand. Using a set of predetermined rules will allow you to remove the emotion from your selling process.

Whatever you decide to do, don’t sell all of it at once. Why? Because of the tax consequences and the possibility of regret if the price skyrockets. If you sell it all right away and it goes up 10x, you will feel far worse than if you sell 95% of it and the remaining 5% goes to $0. It’s this regret minimization framework that you should employ when deciding on how much to sell.

Nevertheless, I do need to remind you that your concentrated position is likely to underperform the overall stock market. If you look at the universe of individual stocks in the U.S. going back to 1963, the median one-year return is 6.6%, including dividends. This means that if you grabbed an individual stock at random at any point in time since 1963, you would’ve earned roughly 6.6% over the next year. However, if you did the same thing with the S&P 500, you would’ve earned 9.9% instead.

This illustrates the real risk of holding a concentrated position—underperformance. While some people may be okay with this risk, others won’t be. Find what level of risk you are willing to accept with your concentrated positions and then sell accordingly.

In addition to selling a concentrated position, you may also need to sell a losing position at some point in your investment life. Whether your beliefs around an asset class change or one of your concentrated positions keeps going down, sometimes you just have to get out.

I experienced this after doing some analysis on gold that made me realize that I shouldn’t own it as a long-term holding. Since my beliefs on the asset class changed based on fundamental analysis (and not emotion), I sold the position. This was true even though my gold holdings had increased in value. While this position wasn’t a losing one on monetary terms yet, I believed it eventually would be, so I sold.

Since losing positions tend to be rare, especially over longer time periods, this shouldn’t be a common occurrence. And don’t mix up a period of underperformance with a losing position. Every asset class goes through periods of underperformance, so you shouldn’t use these periods as an excuse to sell.

For example, from 2010–2019 U.S. stocks gained 257% in total return compared to only 41% for emerging market stocks. However, from 2000–2009, the opposite was true with emerging market stocks appreciating 84% while U.S. stocks were up less than 3%! The point is that underperformance is inevitable and not a good reason to sell.

Now that we have discussed selling to get out of a concentrated (or losing) position, there is still one other reason why you might need to sell your investments.

The Purpose of Investing

The final reason why you should consider selling an investment is the most obvious—to live the life that you want to live. Whether that means funding your lifestyle in retirement or raising cash for a big purchase, selling assets is one way to get there. After all, what’s the point of investing if you never get to enjoy the results?

This is especially true for someone who has the vast majority of their wealth in a large, concentrated position. This person has won the game, yet they don’t want to stop playing. Why take that risk? Why not take some money off the table, diversify your wealth, and create a minimum standard of living that you can’t fall below?

You could establish a safety net for you and your loved ones, fund your children’s 529 education accounts, and pay off your mortgage. Hell, you could even buy your dream car if you want. I don’t care what you do with your money, just take it.

Fund the life you need before you risk it for the life you want.

I only recommend this approach because human psychology suggests that it’s the wise thing to do. As first discussed in chapter 3, each additional unit of consumption provides less happiness than the unit before. The same is true for wealth.

This is why going from $0 to $1 million in wealth provides a much bigger boost to someone’s happiness than going from $1 million to $2 million. Though both changes in wealth are equal in absolute terms, the person going from $0 to $1 million experienced a much bigger change in relative terms. It’s this diminishing relationship between wealth and happiness that should convince you that, sometimes, it’s okay to sell.

Now that we have discussed when you should consider selling your assets, we turn to where your assets should be located.

94 Zilbering, Yan, Colleen M. Jaconetti, and Francis M. Kinniry Jr., “Best Practices for Portfolio Rebalancing,” Valley Forge, PA: The Vanguard Group.

95 Bernstein, William J., “The Rebalancing Bonus,” www.efficientfrontier.com.

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