The stock market is probably one of the best investment avenues for those who are pursuing FIRE. As long as you put in the time and research to pick where and how you want to put your money, it provides great returns on a somewhat consistent basis.
That said, there is still always risk involved when investing in the stock market. This is why for a lot of people it has become standard practice to keep an eye on their portfolio in case they feel the need to pull out.
As Warren Buffet’s famous quote goes, “if you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”. If you have a short-term mindset and try to play the market, the odds are you will lose money. I’ve said it before and I’ll say it again: it’s IMPOSSIBLE to time the market!
Here’s the thing: if you’ve been invested in the stock market for the long-term, whether you started 10, 20, or 30 years ago, you’ve almost certainly made money. The stock market on average has returned about 8% per year. So in our case, the money we put into the market is worth significantly more than it was worth when we initially invested it. Most of our index fund holdings have increased in value from around 20 - 40% since we first bought them. Suffice to say, we’ve made a LOT of money off of these investments.
So now the question becomes: if we’ve made so much, why haven’t we pulled that money out? Well, the answer is actually quite simple: because it doesn’t support our portfolio strategy or our FIRE plan.
Amon and I firmly believe that the stock market as a whole (not necessarily individual stocks) will continue to rise over the long run! Because we’ve made sure that the majority of our stock portfolio is made up of index funds, as opposed to individual company stocks, and considering the market as a whole has always recovered and gone higher, we believe that there is even more money to be made. Pulling out now would cut us off from those future gains.
At the end of the day though, it’s important that you make the decision that is best for you. So, for those of you who are still wondering whether to cash out, I’m going to use a financial independence lens to go over the 3 most popular stock market investment strategies, after which you should be able to make your own decision on whether or not to sell off your stocks.
Strategy 1: Buy and Hold
In my opinion, and based on my personal experience, this is the best way to achieve financial independence. The Buy and Hold strategy is exactly what it sounds like: you buy a stock and hold it FOREVER. It’s important to note here that this strategy works best with index funds that track the entire stock market. Index funds are self-cleansing, meaning that any stocks that fail are promptly replaced in the index with an alternative, better performing stock. Because of this, index funds will never completely lose all value, unlike individual stocks which can drop to 0%.
The best way to execute this “buy and hold” strategy is through DOLLAR COST AVERAGING, an investment method that involves investing a fixed dollar amount on a regular basis into a particular investment. So, for example, you’d buy $100 worth of stocks consistently, every month, regardless of whether the price is high or low. This works because there is really no way to tell when a stock is at its lowest and when it’s at its highest. So you benefit when the stock goes up AND when it does poorly!
So if you’re a “Buy And Hold” investor, when should you sell? When you reach your FINANCIAL INDEPENDENCE NUMBER. (Click here to check out our YouTube video on how to calculate your FI number). One thing to keep in mind, though, is that your portfolio is supposed to sustain you throughout your entire retirement, so it still needs to grow. Because of that, you CAN’T sell it off completely! Instead, follow the 4% rule, which I’ve talked about many times before (check out our Youtube video)!
Strategy 2: Buy Low, Sell High
In theory, this strategy sounds like the obvious choice. But the problem with a “Buy Low, Sell High” strategy is that it is always a gamble. Now, if you want my opinion, I wouldn’t recommend this strategy because of how unlikely it is that you will succeed this way. Attempting to do this can actually result in many missed wealth-growing opportunities because it’s almost impossible to consistently get it right!
Also, this is a strategy that requires a lot more effort, and one that can not be stopped after achieving your financial independence number. You have to keep it up and consistently be buying and selling stocks, even when you’re supposed to be retired. This is a LOT of work.
Most importantly though, is that this strategy needs you to time the market to work, and as I’ve said before, timing the market is ALWAYS a losing game. NO ONE has ever been able to successfully time the market year after year.
Strategy 3: Day Trading
Day trading is definitely the most exciting strategy on this list, way but is it the best way to achieve financial independence? No.
Day trading is actually a pretty scary process - you never know at any given moment how your stocks are going to do, and you have to be hyper-aware all the time! And that’s the main problem with day trading - it’s a full-time job! And using this method to achieve financial independence, well, let’s just say that you’d be working VERY HARD.
On top of that, most people don’t realize how hard day trading actually is. A LOT of people try it and fail! There are significant losses involved in this strategy and the majority of people who do it aren’t successful. There is almost a sort of gambler’s mindset that seems to go along with day trading (for some people, not all), in the sense that if they lose money one day, there is this urgency and necessity to win it back the next day or week, just like a gambler would “go back to the house” after losing big with the hopes of making that money back. Getting caught up in this cycle is when you risk losing a significant amount of money.
Day traders usually put a cap on their gains and losses, meaning that they’ll sell once their stock reaches a certain price point. So they’ll sell either if it passes their goal price, or if it sinks past their minimum set price.
So, to reiterate, let me say this: day trading is INCREDIBLY RISKY and could COST YOU YOUR RETIREMENT. Do not take this strategy lightly.
That said, ultimately the decision on which of the above 3 strategies is best, is up to you and you alone. But whatever you do, just make sure to DEVELOP A STRATEGY and BE CONSISTENT with it!