Should You Sell Winners & Hold Losers As A Retirement Income Strategy?
One income generating strategy that I have been reading about recently in other personal finance blogs is the idea of creating retirement income by selling off those investments that have performed well (the “winners”) and to hold on to those that have lost value (the “losers”) and cutting back on spending to do so, in order to buy some time to let the investment recover.
What’s my take on this?
1. Asset Allocation Trumps Performance
Maintaining an appropriate asset allocation is very important, particularly during retirement when your exposure to risk is high. Do not pursue a “sell winners” or “hold loser” strategy if doing so takes you off of your target asset allocation.
2. Look at Aggregate Portfolio Level
As far as using investment returns as a basis of defining your retirement income, you need to look at the value of your total portfolio compared to a target. If your portfolio is greater than your target, then you can increase your income (up to the point where the portfolio, less the additional income, comes down to the target). The target should be something resulting from a financial planning exercise that considers future expense needs, your risk tolerance, and other income sources that you may have.
To illustrate this point, suppose you have 3 investments, consisting of 1 winner and 2 losers. The winner has a gain of $100 while the losers have a loss of $200 each. If we sold the winners and increased our income by this amount, and held on to the losers, we would end up increasing income by $100 while the portfolio, in total, is down $300, which does not make very much sense.
3. Behavior Is Generally Correct
Holding on to losers until they turn around, and cashing in on winners is exactly what would happen if a portfolio were to be rebalanced to your target asset allocation – you would sell off “winning” asset classes, hold on to “losing” asset classes, and going one step further, you take the proceeds you received from selling the winners and buy more losers – sort of like “doubling down”. However, the intent is to not capitalize on an expectation that losers will go up in the future and winners will come down; it is just to get back to a reasonable risk profile for your portfolio. What you do not want to do is sell losers and buy winners – selling losers locks in your losses, and buying winners is called “return chasing” which usually results in poor returns.
While selling winners and holding losers is appropriate for buying and selling across your portfolio, it is not appropriate for setting the income that you will draw down, which, as previously stated, should be done based on the aggregate portfolio value.
John Bevacqua on April 11, 2012
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What you do not want to do is sell losers and buy winners - selling losers locks in your losses, and buying winners is called "return chasing" which usually results in poor returns.