Depending on which corners of the internet you frequent, you may or may not be familiar with the idea of HODLing. It essentially means holding on to an investment — particularly one in cryptocurrency — regardless of short-term price swings.
Depending on what you bought and how long you’ve held on, the strategy may have made you very wealthy in recent years. A single bitcoin currently goes for more than $95,000 — quite an upswing from the roughly $950 it traded for when the term HODL was coined in 2013.
Some investors have enjoyed similarly spectacular gains in altcoins, meme stocks and more mainstream assets, such as large-company stocks benefitting from the artificial intelligence revolution.
If you’re one of those investors, congrats — you’re rich! On paper anyway. For those who have a huge paper gain, the question becomes whether it’s worth it to continue holding, or to sell and reap actual profit.
Here’s how financial experts say to think through the decision.
You fear an investment might go back down: Hold
When an investment skyrockets, it’s natural to fear that some other shoe will drop and your gains will evaporate. But you’d be wise to avoid acting solely based on this impulse, says Amos Nadler, the founder of Prof of Wall Street and a Ph.D. in behavioral finance and neuroeconomics.
Nadler succumbed to a cognitive bias known as loss aversion when he sold his stake in Nvidia out of fear that the winning position would soon plummet. “What was going through my head was, ‘Hey, I’m new with this. I just made a significant profit in a very short amount of time,'” he told CNBC Make It. “I want to lock it in because I’m feeling afraid it may drop again.'”
The stock skyrocketed after he sold. That won’t always happen, of course, and your instinct to sell a winner may turn out to be right. But it’s important to put your emotions to the side and instead examine an investment on its merits, Nadler says.
“Let’s look at reality and not let our own emotional overlay on reality dictate our actions,” says Nadler. “Because that’s a good recipe to lose a ton of money.”
You’re too concentrated: Sell
Investing experts generally recommend building a broadly diversified portfolio based on the idea that different investments move in different ways for different reasons. By spreading your bets, you help ensure that at least part of your portfolio is doing well. It also negates the risk that a decline in any one investment could drag down your overall performance.
If an investment you own has grown to the extent that it’s now by far your biggest holding, you may want to consider paring things back, says Doug Boneparth, a certified financial planner and president of Bone Fide Wealth.
“That very much has to do with, how much do you want this position dictating the overall performance of [your] portfolio?” he says. “And once you set that line, you then can be methodical about it.”
For Boneparth, that threshold is 20%. Once an investment makes up that percentage of his investable assets, he trims the position.
You may be comfortable with a smaller or larger number, but the reasoning is sound. It’s a risky move to tie your financial future to the fortunes of one particular investment.
Your original thesis is intact: Hold
If you own a winning investment, be sure to examine the reason you bought it in the first place, says Sam Stovall, chief investment strategist at CFRA.
“Why did I buy this stock? Was it for the dividend yield? Was it for the price appreciation potential? Was it for diversification?” he recently told CNBC Make It. “And then you ask yourself, did it meet my goals already, or is there still upside potential?”
If you think an investment has reached the limit of its upside, or has essentially done its job, you can feel comfortable selling.
But maybe a company you bought based on strong fundamentals is still boosting earnings and churning out strong balance sheets. Maybe you still believe in a cryptocurrency’s potential as a store of value. If an investment still holds the same appeal as when you bought it, you can generally feel comfortable holding on.
It will change your life: Sell
If you’ve made a ton of money on paper, it can be tempting to try to push your investment to the proverbial moon. But if having some extra money could make a big difference for you now, there’s no shame in putting some of your profits to work here on Earth.
“If you have an opportunity to change your life or achieve an important long-term financial goal, strongly consider doing that,” Boneparth recently told CNBC Make It. “That likely will be better than waiting to see if that rally or run continues.”
And remember, it’s not all or nothing. You can always sell a chunk of your investment and hold the rest in the hopes that it continues to grow, Boneparth said.
“If you sell half, and it changes your life and also allows you to continue investing and seeing what the future looks like for that company, then you might find a healthy compromise.”
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