Do you have a selling strategy?

One of the most common mistakes for people new to investing is not having a selling strategy.

Buying a financial product is very easy: you go to the bank or an online platform, and a couple of papers (or clicks) later you are the owner of a new financial product.

Great!

And now what?

Warren Buffett said that once you have a great financial product (ok, actually he was talking about shares in great companies) you are just holding on it forever, and enjoy the ride.

But on this, I actually disagree with him.

Do you want to become extremely rich and play empire with all of the money you will get out of investing?

Follow his advice and do a couple of incredibly hard other stuff, and you are on a good way to be a successful capitalist.

Most of us don’t want to play this game, though.

We have goals we want to reach in life, and especially for the most ambitious, we will need to take money out of our investments and use it for something else.

Starting your own business, taking a long sabbatical, granting a bright future to your kids, retire early, you name it.

But to do most of these things you will need money, and you will need to sell a part of your investments.

Which is the best way to do so?

You need to have a selling strategy.

There are mainly 2 of them: the first one is based on avoiding regrets and the second one is based on what’s your (real) risk tolerance.

Let’s start by avoiding regrets.

As I already mentioned a few times, the only risk you should care about is not to reach your financial goals.

To avoid that, you should invest in very safe products (or not invest at all) for goals that are very close to your timeline (0–5 years).

For targets that are farther away in the future, you will probably need to accept a bit more of risk and invest into stocks, which are going up and down more often in the short run.

And what happen if, for an incredible stroke of luck thanks to the rising stock market you manage to reach your goal in only 4 years?

The answer looks obvious: say thank you to Lady Luck, take everything out of the stock market and put it into safer products, or use the money straight away for your financial goal.

At this point, you may feel the seductive greed talking to you, saying something such as “leave everything there, just a bit longer and let it go up a bit more”.

That may even work out, but it will not be a good idea: to get something you don’t really need (more money), you are putting in danger a financial goal that you really want and it’s there, in front of your eyes.

That’s why if you should manage to hit your financial goal faster, you should be thankful and move your money away from risky stuff.

This principle is called rebalancing, and it’s used to improve the chances that you will manage to reach your financial goal.

The closer you get to it, the less exposed you should be to the risky and moody stock market.

Sure, you may miss out some gains and don’t be the next Warren Buffett, but being able to reach a goal you were fighting it’s something worth more than the money you will (maybe) have earned in the market.

That’s the first strategy in a nutshell: gradually reducing your exposure to the stock market the closer you are getting to your financial goal, regardless of how good your investments are doing.

The second one is based on your real risk tolerance, and I called it “the rule of -40%”.

For any amount of money that you have invested in the stock market, or in any other financial product which can go up and down a lot, ask yourself this question: “Would I be ok losing on the spot 40% of the money I put there?”

Note: Being ok doesn’t mean being enthusiastic, it means that is something that you can accept and which will not significantly impact the quality of your life.

40% of 1.000$ is 400$ lost. I can live with that

40% of 10.000$ is 4.000$ lost. Not fun, but I am still ok

40% of 100.000 is 40 000$ lost. That may already be too much for my current financial situation.

Each one will have his own level of comfort, and at least the beginning you should listen to it and not put yourself into situations where you would feel very bad having temporary losses that are -40% of the value of your money invested.

Of course, as long as you are well-diversified and keep your cool, you will probably bounce back even from such a situation.

But it’s not worth to feel too bad, so find out your “magic number” and start to sell risky financial products when you reach it.