Buy, Hold or Sell

I don’t like clutter. I think Launa must like it less than I do because she doesn’t hang onto anything that she no longer needs or uses. Her main criteria for determining whether an article of clothing in my closet should be kept or not is whether it has been worn in the last six months. It is a very practical approach to uncluttering. Her logic is simple. If you are not using something, why keep it?

I have read several reports on the human tendency to be pack rats. Humans, it appears, love to buy things. They love to acquire new toys, but they have a natural resistance to getting rid of stuff. We put things on the shelf of the garage, not because we really expect to use it again, but because we just can’t bring ourselves to throw it away.

I have found this same tendency among investors. They get really excited about the prospects of buying a great new stock, but they often find it very difficult to part with the old ones that are no longer filling their purpose.

Stock analysts try to help people make these difficult decisions by issuing daily “buy, sell and hold” recommendations. In all my years I still struggle to understand what they mean by “hold.” I know what “buy” means, and certainly take note of the “sell” recommendations, but don’t really understand the concept of holding.  Technically, a hold recommendation means a stock is only worth owning if you already own it. If you think about the logic there, it really doesn’t make much sense. Either I want to own a stock or I do not, regardless of whether I already happen to have it in my portfolio. It has always seemed a little wimpy on the part of analysts to not be willing to make a firm decision one way or the other.

Here is how I recommend reviewing your portfolio, and it is surprisingly similar to the way Launa goes through my closet. Rather than think in terms of buying, selling or holding, try to imagine you are starting with a clean slate. Let’s say your portfolio is worth $100,000. Imagine that you have that amount all in cash. Now look at the holdings on the statement and ask yourself this very revealing, and often very difficult question. Would I buy these same positions today if I did not already own them?

Don’t look at your investments too frequently, but when you do, try this method. Ask yourself if you would buy those same positions today at their current prices. If the answer to some of them is “no,” then you should seriously consider why you would want to keep holding them. Like an old shirt that you simply no longer need, if your stocks are not what you would buy today, then why keep them? They will only take up space in your portfolio that could be used for something you really want.