Next up is a question from Charlie. Charlie asks, “If I am picking stocks in my individual brokerage and Roth IRA accounts, at what point should I take profits? I have some positions up 80 percent in a very short period of time. What advice do you have for Charlie?”
Man, I’ll start off. Alright, I think sometimes because, Charlie, I’d be curious to know where you are in the financial order of operations. I hope that you’ve, you know, because this is the reason we talk about index funds and not outsmarting yourself. Because the most important part when you get around step five of the financial order of operations is how much are you saving, not what you’re saving into. And here’s why, before you question, because look, a lot of you are going to say, “Man, I’m making good money,” because he says in the short term he’s up 80% on some of this stuff. This is the dilemma of stock investing, because every one of the no-brainers I’ve ever landed, I typically sold out of them by the time they were up two to three hundred percent, whereas if I’d have stayed the course in them, I’d have made a thousand percent. And then, after I sold them after they made like two or three hundred percent, I’m mad at myself, and I’m still mad at myself for it. And I’m just telling you, you’re wasting a lot of calories, a lot of your mental horsepower on something that might be great, because you’re 80%. I’d be curious to know what that is as a dollar amount. Is 80% a thousand bucks, two thousand bucks? Because I would think, over the long term, it… I would try to figure out how can you max out your Roth IRA in an index fund that you focus on. Now that I’ve gotten the Roth, how do I get to my retirement? Because now you’re not trying to figure out, “Do I buy? Do I sell?” Because it just… Because even if you hold this holding, and it makes a thousand percent for you, you still go… Every day, it’s… Now your focus is going to be on, “Man, when do I get out of this thing?” Because now I’ve got more of my financial life tied into this one egg. All my eggs are in this one basket. I’ve really got myself connected to this thing. It’s just so much drama when I don’t think it needs to be that way. I’d rather you be a stock picker after you’ve set up all the other steps to the financial order of operations. And this is kind of like one of those step-eight-type things where it’s just fun to play around with. From an emotional standpoint, get your foundation first. I sound too much like an old man on the front porch.
But you’re right. This is the time when you’re the right old man on the front porch. Okay? Because here’s what… Here’s what kind of made the hair on my arms stand up a little bit. If you’re going to be a stock picker, and that’s the method you choose to go, it’s really hard because you’ve already figured out you’ve got to get two things really, really right. I’ve got to buy at the right time, and I’ve got to sell at the right time. And every time I sell at the right time, I’ve got to then decide what else I’m going to buy. And I’ve got to buy that thing at the right time and sell at the right time. So, it’s a really hard proposition.
So, what I tell people is if you’re going to do day trading, or maybe you’re not even day trading, if you’re just a new individual stock trader, hearing that you’re doing that inside your Roth IRA makes me really, really nervous. Because those Roth dollars are so, so, so valuable that if you screw up… If you’re like, “Oh, man, this is going to be the one that goes to the moon,” and you allocate dollars there, and then it doesn’t happen, and it goes down and it hits an unrecoverable or something like that, I just worry that those dollars are so valuable. I would not play with those. Because if you lose money in your Roth, it’s a double whammy. I don’t get to take the deduction in my Roth, and because of the limits on how much can go into Roth every year, I might not be able to get that money back into the Roth, or at least not into it unless I do it over a number of years. So, if you’re going to be trading individual stocks, I’d say, “Okay, do that, but maybe keep it isolated to your brokerage account.” At least then, you can take advantage of losses and you can do that sort of thing. As for the win to take profits question because you say, “Now you have a position up 80%,” I love how you framed it at the dollar value matters. An 80% gain… If you’re up a thousand bucks, okay, yeah, maybe I want to see how far this thing goes. I want to keep riding it. Eighty percent gain, you’re up a couple hundred thousand dollars. Well, now you’re talking about, like, life-changing money that may have a very real impact on what Financial Independence and income streams and that sort of thing in the future looks like. We have a saying here that trees don’t go to heaven. Good things may not persist to be good things forever. One in the hand is worth two in the bush. Man, I can throw out all these different cliche sayings, but there’s some truth in that. So, if you’ve made a lot of really good money and you have some stocks that are up 80%, I’m not saying that you ought to sell them all immediately, but I would be thinking through if this is more than 5% or if this individual holding is more than 5% to 10% of my total portfolio value, even if I don’t know exactly when I’m going to exit, I should have an exit strategy. Perhaps that’s reverse dollar cost averaging. Perhaps that’s putting in some sort of limit orders. Perhaps that’s… fill in the blank for the thing. But I would at least have in my mind, “Okay, how am I going to begin to divest out of this position so I’m not one of those people that watch this thing run up, make me 80%, and then I watch it run back down, wait for the recovery, and I’m just sitting there and I lost all that potential value that could have been there.” I would… Good news, because I didn’t realize it was in the Roth account, so the good thing he said he was trading in his brokerage and his Roth. Okay, on the Roth assets, you can trade it tomorrow. I mean, today, and then immediately buy into, like, a total market index or an index Target retirement fund and go ahead and make that motion. Then, here’s the thing. I don’t want you to think I’m telling you to never do individual stocks, but here’s what I would do. I always like creating goals to reward good habits. So, if you’re not at $100,000 of liquid investments or… Have you not made it to step 8 of the financial order of operations? You know what? I’m going to do with these guys. I’m going to go ahead. Today is the day I’m going to do this, the consistent way. Go into that total market index or that index Target retirement fund. Get out of all the reindeer games. But you’ll reward yourself when you get to step 8 of the financial order of operations or a few hundred thousand dollars that you can go allocate. You know, $10, $15, $20,000 to go play and goof off with. I’d be perfectly fine with that. But I think there’s no time better than today, because it’s not like I’m shortchanging you. You know, that’s what I always remind people because if you want innovation, if you want to see things go… Look at the S&P 500 or the total market index. You’ll see Tesla’s there. You’re going to see Google’s there. You’re going to see, you know, Apple’s there. Anything and everything that you’re thinking about will be sitting in that index, likely. Rather than picking the winners in a market-weighted index like that, the winners bubble up to the top, right? You know, it’s kind of the way that it works. Well, you’re sportfishing right now, and I always… You know, and I’ve used this analogy many times. Sportfishing can be fun. Because you get to go tell your friends, “Man, I caught a 16-pounder today,” and you get to do the whole fish hands and everything else. But the reality is, is that I want you fishing with nets because your life and what the purpose and the why of what you need it to do for you is so much more important that you’re not looking for the big fishing stories you can go tell and impress your friends with. You’re looking to actually ensure that no matter what, you’re going to have something that provides for your retirement, the future. So, you go fish with nets, and that’s an index fund. You know, save the sportfishing for when you’ve actually built enough assets up that you have the timing and extra margin in your life that you can go do those fishing stories.