The more I delved into investing over the years, the more I kept reading about the ‘never sell a stock’ crowd, those who refuse to sell virtually any of their good stocks, even if the revenue from it could bail them out of jail! But after my own experience with investing for the last 15 years or longer, and having read so much about the topics, from books and online interactions with other investors, I now get it! Not only that, but mostly embrace the idea of buying good stocks and holding on to them for as long as possible.
The strategy of never selling stocks is often rooted in a long-term investment philosophy aimed at maximizing growth and minimizing taxes and transaction costs. Here’s a breakdown of why some investors choose this approach and the potential end game:
- Compounding Growth
- Reinvestment: By not selling, investors allow their investments to compound over time. Dividends can be reinvested to buy more shares, leading to exponential growth. This is basically where and how most wealth is created. Just let the process play out and don’t interrupt it other than the occasional portfolio review.
- Market Ups and Downs: Long-term holding allows investors to ride out market volatility and benefit from the overall upward trend of the market. If you sell early, and while you may make some profits, you are missing on the long term potential of letting your money grow and grow. Imagine purchasing Amazon stocks in the mid 90s when it was going public, and selling a few years later for a few dollars worth of profits. Now compare that to holding on to that stock, where it would grow some 20,000% over the course of the next 25 years or so. Yes, some people may not have the patience, but as I always say, if you expect to be alive, and will need the money later anyway, why not just keep the money invested so it can grow?
- Tax Efficiency
- Capital Gains Taxes: Selling stocks triggers capital gains taxes. By holding onto stocks indefinitely, investors defer these taxes and allow their wealth to grow tax-free. It is similar to flipping houses: yes you will make money in most cases, but the taxes and transactions fees of doing so often will eat into your profits.
- Stepped-Up Basis: In some places, heirs can inherit stocks at their current market value, reducing or eliminating capital gains taxes on the increase in value
- Dividend Income
- Passive Income: Many investors focus on building a portfolio of dividend-paying stocks. The dividends provide a steady stream of income, which can be used for living expenses without needing to sell the underlying assets. But to reach a point where you have enough dividend income coming in regularly, it is important to keep your stocks in place and avoid selling. The bigger the portfolio of high dividend-paying stocks, the better and more reliable your passive income stream will be, providing financial stability and peace of mind.
- Passive Income: Many investors focus on building a portfolio of dividend-paying stocks. The dividends provide a steady stream of income, which can be used for living expenses without needing to sell the underlying assets. But to reach a point where you have enough dividend income coming in regularly, it is important to keep your stocks in place and avoid selling. The bigger the portfolio of high dividend-paying stocks, the better and more reliable your passive income stream will be, providing financial stability and peace of mind.
- Legacy and Estate Planning
- Generational Wealth: Investors may aim to build wealth that can be passed down to future generations. By never selling, they ensure the continuity of this wealth transfer.
- Philanthropy: Some may plan to donate their stocks to charities, taking advantage of tax benefits associated with charitable donations of appreciated assets. Not only that, but you can typically claim a charitable deduction for the fair market value of the donated stocks at the time of the donation.
- Emotional and Behavioral Factors
- Avoiding Market Timing: Trying to time the market can be risky and lead to poor decisions. A buy-and-hold strategy removes the temptation to make impulsive trades.
- Psychological Comfort: Holding onto stocks long-term can provide a sense of security and stability, as opposed to the stress of frequent trading.
- Stock as Collectibles?
- While it might seem like stocks are being treated as collectibles, the underlying principle is different. Collectibles don’t generate income or grow in value due to business operations, whereas stocks represent ownership in companies that can grow, innovate, and increase in value over time. But hey, if you want to think of stocks as collectibles, that generate money and appreciate in value over time, then go ahead and think of it this way.
The ultimate goal of never selling stocks varies by individual but generally includes:
- Financial Independence: Reaching a point where dividend income or capital growth covers living expenses.
- Wealth Preservation: Safeguarding wealth for future generations or philanthropic purposes.
- Stable Retirement: Ensuring a dependable income stream in retirement without depleting the principal.
This strategy isn’t suitable for everyone and depends on individual financial goals, risk tolerance, and investment horizons. For some, a balanced approach that includes both long-term holdings and strategic selling may be more appropriate. Regular adjustments are needed, as some stocks may lose huge portion of their value over time and require you to sell some or all of it.