The clothes in your closet

There has been some discussion about holding “legacy” stocks. These are stocks in one’s portfolio that one bought a while ago. It’s hard for some people to let them go. Why?

Let’s compare this thinking to the clothes in a closet. People have clothes in their closet. The closet can only hold so much clothes because the size of the closet is limited. When you want to buy a new shirt or pair of pants, you need space in your closet. If you can buy something new that you really want then you first need some empty space or you need to throw out something else that’s in there. Everyone should open their closet and look inside. What’s in there? How much of your clothes do you no longer wear? How much of you clothes have you not worn in a year? 2 years? 5 years? If you haven’t worn it in a long, long time then why is it still in there? The answer to this question may provide you some insight into why you still have “legacy” stocks in your portfolio.

“Well. I haven’t worn this shirt in 2 years, but maybe I will wear it again.” Really??? You think that you’re really going to wear a shirt that you haven’t worn in 2 years? I very much doubt that you will ever wear it again. It is taking up space that could be used for a new shirt that you will wear a lot. Keeping stocks that you bought a long time ago that are no longer at or near the top of your conviction list of stocks (those that you believe will go up from here) will keep you from achieving better returns in your overall portfolio.

“I spent good money on that old shirt so I shouldn’t throw it away.” The money you spend on it is long gone so don’t worry about it. Throw that shirt out or donate it to Goodwill. Don’t worry about the unlikely event that you may one day wear it again. You probably won’t. Don’t worry about a mistake that you made in buying that old shirt; it’s irrelevant to the decision that you can make on keeping it today. Don’t worry about making a mistake by throwing away something that you might use someday; just make the decision and don’t look back! The decision that you made to buy that stock a long time ago may no longer be relevant today. Ask yourself if that “legacy” stock is better than the ones on the top of your conviction list!

If your have a pack rat personality is this way of thinking working its way into your investing decisions or lack thereof? After reading this post, everyone should have a look in their closet. What’s in there and why is that old stuff taking up space!!!

Chris

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What I do when I’m price anchoring (most of people do it at some point right?) is asking myself this question : Even if the stock I own goes let’s say 50% higher after I sell it. What’s the difference if the new stock I bought instead also go 50% higher? I get the same result, the difference is that (normally) my best convictions stocks have a better chance to get this 50% gain (and even further).
Again, I don’t pay taxes on gains when I sell stocks in my country, so maybe it’s easier for me to take that decision.

Best,
Ascent

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what country is that?

Belgium. Taxes on dividends are high though, bust most of our growth stocks don’t pay dividends so it doesn’t affect me that much.

Foreign, non-resident investors don’t pay American capital gains taxes, only a 15% or 30% withholding tax on interest and dividends paid by US domiciled companies.

Denny Schlesinger

Hi Denny,

What I meant is that you have to pay for capital gains in alot (most?) of countries, but fortunately in my country I don’t have to pay for any capital gains when investing in stocks. Because of that I don’t have to worry about taxes when I sell stocks and it’s easier for me to make sell decisions.

Dividends are taxed at 30% though + 15% in most of the foreign countries. That’s a 41% tax if I’m bot mistaken. That why I prefer growth stocks.

https://lifehacker.com/this-flowchart-helps-cleans-your-clos…

I used this flowchart the last time I cleaned out my closet, and begged the better half to do the same. Instead she just commandeered the space I vacated…

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Hmmmm, with that capital gains tax policy and with the quality of Monk-made beer in Belgium…might not be a bad place to consider moving to someday.

Nice post, GauchoChris

Too bad it got derailed.

I have been cleaning out my “closet” for the last two years. I’ve got four “shirts” to go. I just can’t seem to get rid of more than one at a time, but I am working on it (last one was just two weeks ago).

If you want a whole bunch of shirts that take very little space ,buy an index ETF. Which IMO makes conventional “diversification” obsolete.

Limit your stocks to the number that you can follow closely. With tech stocks a lot is happening, uncertainty is the rule, so that limits it further. About all I can handle is 15 or so max. And investing is my only business.

“Well. I haven’t worn this shirt in 2 years, but maybe I will wear it again.” Really??? You think that you’re really going to wear a shirt that you haven’t worn in 2 years?

Well, I still wear around the house a few shirts that I had as a teen and in my early 20’s. I’m 50.

For years, I was lacking in money. One of the ways I saved money was not buying new clothes. I wore a uniform at work, so I could do without new clothes. The clothes I did get for many years came from thrift stores.

It helped me to retire a tad early, even though I may work again.

Fool on,

mazske

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Good points, Chris.

I’ve been cleaning out my ‘closet’ for few years now (from 150-160 stocks couple of years ago to around 110 now).

I’ve to admit that I’m conditioned by TMF to ‘buy and hold’ although I’ve been trying to break loose from that thinking. I’m trying to be proactive to spot losers and cull them before my usual holding period of 3 years.

Currently I’m holding few stocks for more than 10 years! CMG - Originally bought in 2007 and many times after that for a 380% gain so far. I believe this has some more growth left behind it. UA - Bought originally 2008 and many times after for a return of 147%. Believe that turnaround is in works. Also tiny market cap (7B) compared to NKE’s 100B. SBUX - Bought in 2007 for a return of 335%. Holding mainly for stability, little growth and div.

Admittedly all the above don’t even come close to Saul type stocks in terms of growth and potential for cap appreciation. However I don’t think I’m quite ready to go all in with Saul type stocks. Have been going heavy on could/data/new economy stocks for few years with new funds but want to see how they behave in a 30-40% market slide. For now have space for those 10 year old ‘shirts’ in my ‘closet’.

-DU

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