Financial Life Focus

How to clearly navigate your financial life

Letting Go...

Yes, I know it hurts...

"I bought Apple at 85—and you want me to sell it now? It's over 600 now, why should I sell it?"

"Yes, Alan, you have done incredibly well. Buying Apple at that price turned out to be extremely fortunate for you. But now, Apple stock represents a significant portion of your wealth. We believe it is prudent not to have such a high concentration in one stock, but to diversify your portfolio for greater safety and breadth of holdings." 

His sigh filled the room. He was clearly battling with the concept of selling such a successful stock purchase. Not only did he accumulate a significant degree of wealth, but better yet, the ego gratification of his brilliant foresight in making the investment when he did.

"All the forecasts show the stock projected at 900 a share. Why should I leave all that profit on the table?"

"When do you think it will hit 900? In a week, a year, ten years?"

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"I don't know, but what differences does that make? If it goes from 600 to 900, that's a great profit. I just can't see leaving all that on the table?"

"Well, Alan, I absolutely see your point, but the difference is, if it takes ten years, your return on investment during that period will not be very impressive. The fact is, you've made a tremendous profit—it's time to take the lion share of the profits and reduce your risk and spread your holdings in other areas besides Apple."

The consternation was plain in Alan's face. There was a lot of issues to his internal struggle; he now held the bragging rights of making an investment that turned out so well-if he sells, and the stock continues to soar, he will feel regret for selling 'too soon.' He also feels that if the stock pulls back, he still has a tremendous profit, and as he stated, "I doubt it will go back to the mid-80's."

The fact is, Alan's emotional connection to Apple and his own sense of success is very much wrapped up in his decision to sell or hold. He feels powerful and successful-and the fear of selling too soon and being the source of ridicule, "You sold it WHEN?" plays in his mind as he battles against the prudence of taking his profits, diversifying his holdings and lowering the overall risk profile of his portfolio.

After a few minutes, Alan hits upon another reason to hold his ground, "If I sell this, I am going to have a heck of a tax bill—I don't know if I want to write the check to the government."

I fought back a smile, "Yes, you will pay some tax-but it will be at the preferable long-term capital gains rates. You should note, that while there is nothing in the books yet, there is a great deal of talk about increasing the capital gains rates in the near future. So, you might be saving yourself a good deal of tax besides the other benefits we discussed."

Alan was in an quandary. His brain was telling him to be prudent—his emotions were fighting tooth and nail to stay pay and maintain his skill and mastery as a successful stock picker.

The conversation was similar to conversations held with clients during the tech boom—where tech stocks were valued to the moon and investors believed that the moon was just the beginning of what lie beyond. I am not comparing Apple to those speculative companies that offered promise, but little more, but I am comparing the sense of elation and belief and unbridled optimism in their ability to know when to sell and amass fame and fortune because of their superior skills. The fact is the tech sector crashed and burned along with the lofty dreams of investors pouring money into hopes and dreams—especially those who had every opportunity to take profits, but didn't. The lessons of the stock markets are there for all to see and is littered with casualties of those who believe in their ability to 'know' the market. 

Our beliefs create behaviors around money that cause us to make decisions counter to what is appropriate or prudent. We need to see what is ruling our actions and attempt to step back and let it go. Financial success, especially in the investment arena, is rarely realized when emotions overrule reason. 

Meanwhile, Alan is still thinking...

 

Michael F. Kay, a Certified Financial Planner, practitioner and a CPA, is president of the firm Financial Life Focus.

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