Knowing when to sell is as important as knowing when and what to buy, but the decision can be an emotional one. These tips from Merrill can help you time your decision.
More than any other investing decision, finding the right time to let go of an investment can be driven by emotion. If an individual stock, mutual fund or exchange-traded fund has performed well, you may feel like you are giving up potential future gains by selling. FOMO, or fear of missing out, is a reason many investors hang on longer than perhaps they should.
On the other hand, if an investment has lost ground, you may be reluctant to sell because you will not be able to recover the value you lost. Selling at a loss feels like defeat.
Neither of these impulses is hard to understand. Yet it is just as important to have a plan for when to sell an investment as for when to buy one. Selling, like buying, is part of the investment process.
Consider these six reasons to sell an investment — more than one may apply.
1. It is time to rebalance. Your target asset allocation should align with your investing goals, risk tolerance and time horizon. It is important to regularly review your portfolio against those targets and rebalance when necessary. For example, if equities have surged while bonds stayed flat, stocks might make up 70% of your portfolio instead of the 60% you targeted. You may need to sell some stocks or stock funds to restore the balance.
2. Something has changed. That might include a shift in fundamentals. For example, guidance about a company’s earnings is disappointing. With funds, a change in direction could mean the fund is no longer aligned with its role in your portfolio. There could have been a management change, or perhaps the manager’s performance has dipped relative to similar funds.
3. The economy has shifted. If a possible recession is on the horizon, for instance, certain sectors, like consumer companies, may underperform the market and could be candidates for a sale. Interest rates, too, can make a difference. When high rates make financing expensive, small-cap stocks and asset-heavy companies that depend on capital expenditures could face headwinds.
4. You want to avoid excessive concentration. This can affect investors who have received shares in a company as part of their compensation or who own stock that has outperformed the market and grown to dominate a portfolio. Overly concentrated positions like these can bring outsized risk.
5. You are retiring or have a need for cash. Trimming positions could help you generate cash, either for a large expense, such as a home down payment, or to make sure you have adequate income as you prepare for retirement. Selling assets strategically in anticipation of a need for income can help you avoid having to make a sale when markets may be down.
6. You need a tax loss to offset capital gains. Selling an investment at a loss may be easier to accept when the loss can be used to offset capital gains and may reduce your tax bill. But do not sell an investment solely for tax reasons. Even if the investment has hit a rough patch, consider its prospects and role in your portfolio. It may be a good idea to talk with a tax professional and your financial advisor before selling. Also, if you sell an investment at a loss and buy it or a similar investment within 30 days of the sale, you will not be able to deduct the loss on your taxes due to what is known as the wash-sale rule.
Now for the other side: There can also be many reasons not to sell, but these two can be particularly important.
1. Your “overvalued” stocks may still have room to grow. The share price of a stock should not be viewed in isolation. Even when certain stocks seem very expensive relative to historic valuations, consider the potential impact of big-picture trends and innovations. You may come to a different conclusion and decide to hang on.
2. It is important to stay invested. During broad market corrections, the urge to sell may be hard to resist. But over long holding periods, stocks have historically outperformed cash. By staying out of the market, you may miss the recovery.
When you are tempted to sell an investment, it is critical to keep the larger picture in mind, stick with your investing plan and focus on staying on track toward your goals. If you work with an advisor, in-depth conversations about when to sell are just as important as the conversations you are likely already having about what to buy.
For more information, contact Merrill Lynch Wealth Management Financial Advisor Jeffery D. Price of Price & Associates at [email protected] or (817)-410-4940.
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