In general you should buy and sell stock with a much longer time horizon without regard to current economic news. Over almost any period of ten years or longer, a diversified investment in stocks will make you money. Your plan should include some version of the following:
- Money needed for retirement more than ten years in the future should be investments heavily weighted towards stocks with some inclusion of growth companies
- Money for retirement in the five to ten year horizon should be move into more blue chip stocks
- Money for specific uses in the near term future – like near term college costs – should be invested in interest bearing instruments like high grade corporate bonds and dividend paying utilities
- Money for immediate use should be in money market instruments
First establish a financial plan including the following steps, in this order:
- Set aside enough money for short term emergencies. Some recommend a six month cushion – others may suggest a somewhat smaller amount. Put this in a savings account or a money market fund at your bank
- Provide adequate life insurance for your family
- Then create an investment strategy for your future money needs
If you have established this base level of financial assets, you will have the foundation and security to make decisions on stock investments in a less tense environment. Start to build a portfolio.
Your investment portfolio should take risk into account. Some stocks go up, others go down. Some industries come into favor and others fall out of favor. To make your portfolio withstand the business cycles, invest your financial assets scattered across different industries and companies. Include well run, no-load mutual funds. Because the funds invest in a variety of companies, they automatically create diversity and safety in your portfolio.
However, this approach to a lifetime plan does not mean that you should never sell individual stocks. New information comes into the market; new companies come onto the scene. Some existing companies do not perform as anticipated. A regular review of each investment in your portfolio is necessary. Some will get sold, others added.
But to the question of whether you should liquidate all of your stock holdings, there is the following to consider.
Selling everything requires an alternate place to invest your assets. Very secure investments, like treasury bills, bank CD’s or even a savings account, currently have a very low rate of return so your assets will grow very slowly as the economic cycle turns stronger. And if you buy long term interest bearing securities, they will even decrease in market value if interest rates rise compared to today’s exceptionally low rates. It also means that you will miss any future increase in the equity market’s value.
If you are facing retirement in a year or two, you should have moved much of your portfolio into less risky investments already. Good corporate bonds, perhaps an annuity from a highly thought of insurance company or money market mutual funds all make for an investment that gives you predictability in the near term future as you need to withdraw funds to finance your life.
Otherwise, if you are more middle aged, stick to a plan that includes:
- A well-diversified portfolio
- Regular reviews of the performance of each stock or mutual fund, with lower performing issues replaced
- A long term and systematic move towards more stable stocks and investments as you age and you become closer to requiring the withdrawal of your funds
A drastic step like liquidating your entire portfolio is not likely a good plan. If you are planning for years ahead, a long term plan is your best bet.