A practical example about buying or selling stocks

Updated: Feb 6

In our article, Investment Thoughts For Our Children we suggest:

“Investment risk management is a function of time. I.e., the longer the time period, the higher the properly managed risk may be realized to maximize return. A 7 plus year timeframe should be invested in higher risk profile equity portfolios.”

This article provides a practical example for implementing this suggestion. A friend of mine was telling me of a story about his son. He said:

“Talking to my son, he worked at Home Depot for 7 years and has stock. He told me last night he lost $35k in stock value over the last month.”

He asked what I thought. Next is how I responded:

My usual stock investment buying or selling discussion with my children relates to time frame. Basically, taking a long view, beyond the average 7+ year business cycle, is key to evaluating individual equities like HD. If one of my children asked about buying or selling Home Depot, my response would be something like:

Do you have reason to believe that:

1) the housing and related home improvement market is going to be a significant market in 7+ years.

- And -

2) do you believe HD is likely to be a dominant player in that market over the same time? If 1) = YES and 2) = YES, then stick with HD stock, - Else - If 1) = YES and 2) = not sure, then focus on a housing related ETF and reduce exposure to HD, - Else - If 1) = not sure and 2) = not sure, then focus on a broader market ETF and reduce exposure to HD. It really comes down to how much time and expertise one has to research individual equities and markets. Being honest about this is most important!! Also, notice the default “if I never get around to equity or market research” answer leads one to accumulate a broader market ETF. This is a great default position for most long term investors. Even if one does nothing with their HD position, new money will be invested in a broader market ETF, UNLESS they do the HD research.

If you want more information for managing a single equity, like Home Depot, in the context of a broader investment strategy, see the article Our investment barbell strategy.

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