“Waiting for It to Recover” Before Selling

Allan and Bill are each retired.

• Allan purchased 100 shares of Vanguard Total Stock Market ETF (VTI) on November 5, 2021 at a price of $242 per share.
• Bill purchased 100 shares of VTI on September 30, 2022 at a price of $179 per share.

Now imagine that today is February 24, 2023, and the price of VTI $200 per share.

So each person’s 100-share lot is worth $20,000. (We’re assuming here that they each have dividends set to not be reinvested, so that they can use the cash flow for spending. Point being, each person still has the same 100 shares they purchased originally.)

Now imagine that Allan and Bill each have an unexpected expense arise, for which they need to spend about $20,000 from savings.

To Allan, selling VTI would probably feel bad. He bought it at $242, and now it’s worth $200. It feels like he’s “selling low.” Allan might be reluctant to sell this holding to raise the cash needed for spending.

To Bill, selling VTI would probably feel good. He bought it for $179, and now it’s worth $200. It feels like he’s “selling high.” Bill would probably be happy to sell this holding to raise the cash needed for spending.

But the truth is, even though the current price feels low to Allan and feels high to Bill, it’s the same $200 price per share for each of them. They would each be getting the same amount of money, for the same amount of shares.

And, critically, the fund’s future performance is unaffected by the price at which either person bought it. Allan might be tempted to hold on and wait for the fund to recover, while Bill would be happy to sell. But the fund is no more likely to have good future performance for Allan than for Bill.

If you need to sell a holding (either to raise cash for spending, to rebalance, or for any other reason), what does matter is:

• Would selling this holding bring your portfolio more closely in line with your ideal portfolio (e.g., because it simplifies the portfolio, reduces costs, or brings you more closely in line with your target asset allocation), or would selling this holding move you further from your ideal portfolio?
• What would be the tax consequences of selling this holding? (If it’s in a retirement account, there are no consequences. If it’s in a taxable account, it’s actually a good thing if you would be selling for a loss, because that loss can be used to offset other capital gains or potentially ordinary income.)

Some people would add a third consideration to the list, which is whether now is a good or bad time to sell the investment in question. Without getting into a discussion of “does that count as market timing?” I’ll just note that if you want to try make such a determination, it should depend on things like current real interest rates and stock valuations (e.g., PE 10), and it would have nothing at all to do with the price at which you personally happened to purchase the investment in question. Whether the current price is higher or lower than the price at which you purchased is only relevant for tax considerations.