I got a question from a reader yesterday, which I am going to attempt to explain today. It starts with a basic given from my reader, which is this:
When you buy stock and it goes down, as was the case with you and Microsoft, and you sell it, you lose money. When a stock goes up and you sell it you make money.
Yep, that's about it in a nutshell. As I understand it, part one of the question is essentially this:
When you have stock (such as Microsoft) that is high right now but you do not sell, how do you treat the hypothetical money you could make by selling?
Well let me just say right off the bat that I treat our investments by almost pretending they do not exist.
Almost. Anyone who's ever seen me check how the market is doing knows that's a bit of a stretch!
So when I say I pretend our investments don't exist, I mean we do not treat our investments as money we can tap into now. It is treated as unavailable and off the table. Unless there are unexpected expenses and I must sell something, these investments do not figure into our budget/living expenses.
It can be dangerous to spend money based on what you own in stock. People who live beyond their means are especially at risk when there is a market downturn. In recent years alone there have been a number of crises of epic proportion. In 1987 the stock market crashed. The dotcom bubble of the late 1990s burst in 2002. And In 2009, we watched yet another major market "adjustment" where many people saw their hard-earned 401ks shrink as much as 50%.
Fortunately the market has recovered well since all of these events, but like so many things in life, the market runs in cycles. That's why investors like Warren Buffet espouse the buy quality & hold philosophy.
While I still think investing in the stock market is the way to go (and can say that after weathering a storm or 2), treating stock investments as cash is a terrible idea. Remember: It's not cash until it's sold.
We could opt to sell a stock like Microsoft right now-- it's been soaring along quite nicely this year, and next year's projections are somewhat less exciting. There are schools of thought that suggest you should sell stock (or even just part of your shares) when the price is high and re-buy it when it goes lower.
I see nothing at all wrong with that, and I have done exactly that a few times with another stock we own called Stryker. That does get into capital gains and taxes territory (topics for another day). It also gets into how to buy & sell as well as how to place orders.
And it also involves that none of us have a crystal ball to know exactly when to buy and sell. When I find one, I'll let you all know.
Part 2 to the reader's question is for tomorrow, and here it is--
The money (in a stock) is not really yours and you can’t treat it as a constant because the market can change at any time, so what can you use your invested money for?
So stay tuned!