While I think about money and investing every day, it’s rare that I have an epiphany. But last week I had one.
On Friday, something crazy happened to my investment portfolio. I hold 931 shares of Meta (Facebook) and the stock had its best day ever. It was actually the best day ever for any stock. Ever. The shares rose 20% from $394.78 to $474.99. This $80.21 increase resulted in gains of $74,675.51 for my portfolio.
In 1998, my first job out of university paid me $37,000/year. So I made more money in one day than 2 years at the job. Money working for you is always better than working for money. But there’s a big caveat.
If you would have asked me a year ago which of my holdings I was least enthusiastic about, I would have said Meta:
Facebook is a dying company. Social networks are trendy and go out of style as quickly as they become popular. See Friendster and MySpace.
Facebook is being overtaken by TikTok and Snapchat. My kids tell me that Facebook is for old people and “wouldn’t be caught dead there.”
If I had to get rid of one holding, it would be Facebook.
Now, the stock is at an all-time high and accounts for almost 10% of my portfolio. And I thought I was smart.
Confession: Index Fund Doubter
I didn’t know what an index fund was until 2013 when I discovered Mr. Money Mustache and read this post by JL Collins. Before that, I bought individual stocks. And I even did well. An obsession with tech along with a stubbornness to sell yielded great results. I sit on $1,220,496 in gains:
I sing the praises of index funds and they’re where most of my money goes now. But I’ve always had doubts too. Voices in the back of my mind whisper misgivings:
Your individual stocks have done really well. Are you really sure you want to trade them in for index funds?
What if you sell a stock and it goes on to crush the index? How will you feel?
But then Meta, the stock I had the most doubts about is killing it. And some of the other stocks I’ve held with enthusiasm like Google and Tesla aren’t doing so hot.
It’s so hard to predict the future. The big tech companies I’ve done the best with don’t look much like they did when I bought them. And there is no way I could have predicted what they’ve become. Did I just get lucky?
I know that I should get rid of individual stocks. I also know that I’ll do it over multiple years to save on capital gains.
The question I’ve been thinking about for years is this:
How do I sell the stocks?
- My original idea to sell all of my Meta shares first. That wouldn’t have worked out well.
- I still think that some of my holdings that have heavy investments in artificial intelligence (Google and Tesla), have a lot of potential, but maybe not. How close is Tesla to solving autonomous driving? The more I think about it, the more I think it may not be this decade.
- I think Big Tech will continue to do well because of AI, but also, what do I really know? How AI will play out is anyone’s guess. Technology is moving fast and the pace is accelerating. The dominant player in AI in 2030 could be a company that doesn’t even exist yet. Or, AI could turn out to be a tremendous flop.
What do I do?
The Answer Was Their All Along: Reverse Index Fund
Index funds are the best way to invest for most. Index investing is an acknowledgement that I have no idea who the winners will be, so I’ll just buy everything.
And if I acknowledge that I can’t figure out which companies will be the winners, I also must acknowledge that I can’t figure out which ones will be the losers.
The Big Thing I came to was this:
I will sell my stocks the same way I buy them. I need to sell them in equal percentages, not attempting to pick losers. An index fund in reverse.
I started to execute this plan last week when I sold about 2% of each of my stock holdings:
Should Mindy leave her job and we longer have her income, I’ll pick up the pace of these sales.
This strategy takes myself out of the equation. No more spending countless hours considering which stock to sell. No more second guessing myself after I’ve sold the holding. This feels good and right.
More 1500 Days!!!
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Carl – Congratulations on making the decision. I am dealing with the same thing with Costco and I consider Berkshire a mutual fund and am not including that in the sales.
One comment always sticks with me: Why risk money you have and need for returns you don’t need. That keeps me away from going heavily into individual stocks.
That’s a great quote.
And yeah, Berkshire is so diversified already, you make a great point there.
Hi Carl,
This is a great strategy. I read on title and could not understand. But now I understand it. Are you planning to start some mega backdoor Roth rollover when Mindy leaves work.
Looking forward to meet you at Econome .
I know the feeling of your existential crisis. In a similar position not wanting to leave my spouse/kids with a complex portfolio, I concluded that I should trim my most heavily weighted individual stock in order to reduce concentration risk. While I’m at it, I take some losses to offset those gains.
Wow you’ve crushed individual stocks–I can see the hesitation to commit fully to index funds! I’ve got much smaller pieces of Apple and Microsoft that have done really well, but VTSAX is pretty heavily concentrated with them so I have plenty of exposure anyway. A good reminder that even when you sell the individual companies for an index fund, you’re still invested in them!
I took a look and VTSAX’ top 8 holdings (about 24% of total holdings) are all big tech. Tech has taken over and I’d expect it to continue to do so.
And I certainly can’t blame you for holding on to Apple and Microsoft. Both of those have great leadership and I believe are poised to continue to do really well.
VTSAX top 10 holdings:
Total
26.47%
I’ve been waiting for a post or podcast on how you would wind down the individual holdings. I think your strategy is sound! Congrats on your success with these. I’m the exact opposite – the few stocks I’ve bought I’ll look at the ticker 50 times a day and then sell at the first swing in price within a month, lol. Thank goodness for index funds – I’ve never felt the same inclination to watch or fiddle with those. When will you share the scoop on the pre-IPO holding by the way?
Hey PB!
The pre-IPO holding is SpaceX. After the Starship program is developed and launching cargo regularly, Starlink may be spun off in an IPO. It’s all a couple years off at least, but fun to think about.
Mindy might have learned a thing or two on the cruise ship that could help you out, but long story short:
Transfer your biggest gains to a Donor Advised Fund, avoid the massive capital gains taxes AND benefit from the full value of the donated appreciated shares as a tax deduction in the year of the donation. Everyone’s a winner except Uncle $am!! ????
Yep, it’s in our plans!
You really got me with that title. I couldn’t figure out what you meant by reverse index fund.
Technically, a reverse index fund would mean you weigh sales from your basket of individual stocks by market cap as percentage of the whole basket. But, equal weight is good enough and much simpler. I wouldn’t change a thing.
Do you keep track of all the stocks you sold at a loss? (Sorry if I asked this before.) I have a spreadsheet to keep myself from thinking I’m a genius just because some stock I bought went up.
Ha, I thought about the market cap thing. I also thought about selling by my own market cap. For example, since I own more Tesla than anything else, perhaps I should sell a lot more of it as well. In the end, I just went with an equal percentage across the board.
I don’t keep track of losses, but I don’t have many either. Just a little bit of Tesla when I tried to catch a falling knife and paid the price!
Hi Carl, various investment companies have been pitching me a direct-index strategy to get out of concentrated positions. The strategy buys stocks to mimic the S&P 500, and does tax loss harvesting while swapping positions like-for-like. Theory is you capture all of the S&P 500 gains and generate opportunistic losses. Use the losses to offset gains from your concentrated position. Unlike most strategies that seem to only generate fees for the manager, this one makes sense to me. In 2023 this strategy worked great because even though the market was up overall, there were lots of opportunistic losses that could have been taken throughout the year. Just a suggestion to minimize taxes while hopefully allowing more sales of your big gainers.
Caveat: I lost out on $3.5 billion in gains by diversifying out. Not kidding…
I have done some loss harvesting too. The last image on this post shows me selling some $TSLA at a loss. That’s what I get for trying to catch a falling knife!
And 3.5 billion?!?? I’d love to hear that story. Any interest in telling it on a podcast? You can be anonymous. If not, that’s cool too. I’m really curious to hear the story though.
Ah that’s an excellent idea! Thanks for sharing.
I usually just sit on my portfolio and hadn’t done anything with it outside of a couple impulse buys in the past two years (TGT) . Even as a fairly average stock picker (I didn’t buy any tech, I mainly bought consumer goods like COST, SBUX, TGT) my gains are solid. Nothing on the level of yours, other than COST, but certainly enough for me to ponder how to best handle the capital gains tax bill. If I were ready to open a DAF, that’d be one neat solution to the whole thing. I’m still very hands on with helping the Pine Ridge reservation families which requires me to be the one spending the money, otherwise I’d look at donating directly to them. Good food for thought!
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I think you are making a data supported decision that is wise. Regardless of how you get out of individual stocks its a good idea to use index funds instead. The fact that paid professional mutual fund managers cannot consistently out perform index funds says it all. And the fact that you’ve had a good run with individual stocks is completely irrelevant and in no way indicates you have an enhanced ability to pick the best stocks. In any random distribution there will be a small number of samples that don’t appear to be random.
Here’s another, similar approach you could take. Sell your stocks on a weighted basis such that you pare down your tech holdings to be more reflective of an S&P500 index fund.
For example, the S&P500 is about 1% weighted to Tesla, and your tech portfolio is weighted almost 43%, so you’re 43x overweight TSLA.
Your Amazon share is about 10.5% vs the index share of 4%, so you’re only 2.6x overweight. Your Google share is only 0.3% vs the index 4%, so you’re actually underweight there and wouldn’t sell until much later.
You could distribute the weighting of your sales based on how overweight your holdings are relative to the index. This has the effect of systematically selling the winners that are potentially “peaking”, i.e., selling at the top, while giving the smaller holdings more time to grow. It also forces you to diversity more quickly, by prioritizing the sale of stocks that you are heavily over-invested in.
Never wasting a spreadsheet opportunity, I came up with the below (just for individual stocks, ignored VGT and QQQ as those could be incorporated via a more in-depth analysis by looking into their individual holdings).
When selling, the proportions would be as follows:
TSLA: 73.9%
META: 18.9%
AMZN: 4.9%
BRK.B: 2.3%
So if you wanted $5,000, about $3,695 would come from TSLA. You’re underweight GOOG and COST so we’re holding those for now. Curious to hear what others think of this approach.
Thanks for the input! I’ll take this under consideration next time I have to sell.