The Overnight Rule For Managing Your Portfolio

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Recently, I came across an investment tip called the Overnight Rule from Carl Richards via the NYT Bucks Blog:

Imagine that all your investment holdings were sold overnight by accident.

You can’t undo the trades, and now all you have is cash.

Would you buy back everything you owned previously again at their current prices? If not, why are you holding them now?

I think this provides a fresh look at your portfolio, as many times we hold investments for irrational reasons. For example, there is the well-documented trait of loss aversion (even though readers of this blog may be immune), where investors really hate selling at a loss, even more than they love selling with a gain.

Perhaps you bought the stock at $20 a share, and it is now at $15 a share. You want to get rid of it “just as soon as it gets back to $20 a share”, so that so you can say you didn’t lose money on it. It’s better to admit the mistake and put your money in something better.

Then there is regret aversion. Perhaps you bought it at $50 a share and now it’s at $400 a share. You get to tell your friends how you bought Apple at $50 a share. You’re afraid it’s overpriced, but you don’t want to miss out if it rises some more. You sit on your gains and choose inaction instead of having to make a hard decision even though your money could be better deployed elsewhere.

Maybe it is company stock from your job, or shares that you inherited from a beloved family member. Whether is it some form of sentimental attachment, inertia, or plain laziness – you may want to consider your reasons for holding them.

There is a small exception to this rule if you are sitting on large capital gains in a taxable account and don’t want to realize them and get hit with the tax bill, especially if the alternative investment is also very similar (ex. mutual funds with similar holdings). However, even in this scenario you want to make sure that you’re not holding a poor investment just to put off a tax bill.

I did not come up with this myself, but read about this rule somewhere online within the last month. I’ve searched for the source but can’t find it, so please let me know if you do. Found it, thanks!

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  1. jack foley says

    Don’t think so – i would re-evaluate everything and see where I would get the most bang for my buck right now..


  2. This is an interesting take! So often it seems that people feel like they need to stick things out to long, whether they’re in a good or bad spot!

    If there are better options out there, might as well take them fast!

  3. Aversion… I don’t know. When we put our money into stock, bonds, etc. shouldn’t we make sure we are aware and understanding of where the money is being placed? I know this isn’t always the case and even more so when we are just stepping into the capital gains world, but its a scarey place.

    I think i’m gonna avert to my mattress. 🙂


  4. It was in the bucks blog for the nytimes.
    Kudos to you for noting the need for the source in your blog.

  5. Yes, I would, or pretty close to it. I plan to simplify my portfolio a bit when I rebalance in the spring, after I know how much of my tax refund I can contribute to my Roth IRA. I’m deep in the thick of a “buy-and-hold diversified index funds” focus, and it’s working alright for me with a fairly long window ahead of me, so I’ll stick with it.

  6. Sam Johnstone says

    I understand the idea behind this, and the need to cut your losses, but this doesn’t make sense in all cases. For example, I am a buy-and-hold value investor, who favors dividend stocks over growth stocks. I seek to buy equities at deeply undervalued prices and hold for very long periods. As Warren Buffett says, the ideal holding period is forever. There are actually several holdings I would not re-buy at today’s prices, but for which I still feel my investment thesis is solid, and they still have room to grow. I am not evaluating these equities on what they cost right now, but on what I paid for them, but I think this actually makes sense. Especially when you factor in dividends, where I am not thinking about the current dividend, but my yield-on-cost.

    I think the problem with this “overnight rule” is that if you actually follow it, you are going to wind up being lured into trading rather than investing and into chasing growth stocks when we know that dividend stocks (with dividends reinvested) actually perform better over the long term. This is going to lead to increased transaction costs, and for most people I would think, poorer results.

  7. I own Apple, and feel very comfortable with my money there — with earnings growing by 50-100% y-o-y and a P/E under 13, I think it’s UNDERvalued. Their $100b in cash me feel warm and fuzzy as well…

  8. Short term gains and long term gains are taxed differently so if you’re close to holding something for a year, this may make a big difference convince you to hold.

  9. Years ago I used the same type logic in deciding if I should pay off my house or invest in the stock market.

    For example, assume you have a 500K house and owe 200K. Also, assume you have the cash in the bank to pay it off or invest in the stock market (assume you have an adequate emergency fund, etc). Should you pay the house off or invest in the market? Back when I made the decision to pay my house off was in 2000. All of my friends thought I was stupid for not playing the market with the equity in my house. I knew several that even took out HELOCs with their available equity to invest. Fast-forward a couple years later, and I have a paid off house and they have lost 50%.

    Another example. My wife had a lot of company stock. I couldn’t get her to sell any of it. I asked her to imagine we had cash instead of the stock. Now, with that cash would she go out use all of it to buy her company stock? Once she thought in those terms it convinced her to sell a little bit.

  10. This is a great exercise. I try to deal with my irrationality by DCAing out of positions I wouldn’t buy today. When they are small enough to be “play money,” I leave them alone.

  11. Neat exercise. I’d buy the same asset classes, but of course the replacement I-bonds in my portfolio would have a much lower yield now.

    (I was about to say the same thing for my individual TIPS bonds, but then realized they would have been sold for a gain that would make up for the lower yield I’d get today. Not so with the I-Bonds.)

  12. For me, it’s:
    buy at $20,
    watch it go down to $15,
    Admit my mistake and sell,
    Watch it go back up the very next day.

  13. I am still relatively young so holding for the long haul is still a viable strategy for me. For the elder posters they might want to sell.

  14. I bought Apple at 100 and traded it until I sold at 200. I’ll be smart again and wait until it gets back to the 200’s. Right now seems overpriced.

  15. Aha, it was called the Overnight Test and not Overnight Rule. No wonder googling Overnight Test and stocks came up with nothing.

    Apple is just an example. If you would buy it all over again today at $450 or whatever it is, then you should hold it. If you really think it will go up, you should be being even more. If you would be against buying it all over again at $450, then consider your reasons for holding it now.

  16. Interesting intellectual exercise that has some value, but I think it may be flawed. The implication is that I should always be invested in the very best investment prospects (according to my assessment) at all times. What about transactions costs? Tax implications? Not to mention patience! Thinking a company (for example) has good prospects is one thing; accurately predicting when those prospects should be fulfilled–or it’s time to sell and move on–is quite another.

    My sense is an individual who, at the extreme to make a point, divested then re-invested his entire investment bankroll even say monthly for 20 years–based on the best current info–would do worse in the long run than someone who bought the Vanguard Total Market Index and let it run for 20 years.

    Fun to think about though, and does encourage one to accept a loser as a loser when the case has thoroughly been made!

  17. Sadly taxes and transaction costs are hard to ignore. Even a small amount of capital gains can be pretty significant. True, if you have a “bad” investment it’s not going to matter, but the differences between many investments are very small, such that losing 5% to taxes right away is a bad idea.

  18. The classic “math vs. behavior” battle haha thunderdome anyone?….. ok so the mad max references aren’t really needed but I digress…. This idea is paramount to how people should invest. Investing 101. Whatever your system is, you need to take your emotion out of the equation. You need to stick to your system and be able to execute your plan. Have your tolerences built in (for both buying and selling) and stick to your plan. If something isn’t working, don’t change everything haha just a single variable.

    the trifecta of investing
    1. liquidity
    2. execution
    3. a systematic process to investing (whether it is DCA, trendlines, tolerences, etc. make it automatic and take YOU out of the picture)

  19. That assumes trades are commission-free and tax-free…

  20. If you had bought the stocks at a low price, and they were sold at a high price, you might want to take your profits and find new stocks that you could buy at a low/undervalued price.

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