Deciding when to sell and when not to sell is just as important as knowing when to buy and when not to buy. That’s true even if a majority of the educational materials focused on the financial markets do not talk much about selling. Here are some key insights you should consider to know when to and when not to sell.
When to Sell
Generally, for investors, it’s reasonable to want to offset gains until they can realize them in a lower tax bracket. For instance, when you are in your A-game in terms of earning, your investing income will be taxed more stringently than when you are already retired. As a result, you would only have few reasons to sell before that time comes.
You’re Adjusting Your Portfolio
Investors usually sell when they want to adjust their portfolio. The most common reason for investors to want to adjust their portfolio is when it becomes unbalanced and therefore unsuitable for their investing goals.
This could be caused by a huge life event like marriage, divorce, retirement, or even an accidental concentration of your money in one sector.
As we all know, it is quite dangerous to put a significant amount of your stocks or capital into one sector. Diversification generally offsets the chances of losing everything you have. However, you also have to be careful not to over-diversify as this could stunt your portfolio’s growth.
You want to Free Up some Capital
Another reason why investors want to sell an investment is because they want to free up their capital, which could be needed for something important such as financing a new investment or business, paying for something important and expensive, and even taking a vacation.
And the best way to free up some capital is to realize losses to offset your gains. For example, if you have two investments one of which has suffered losses and the other has experienced gains, you might want to sell them both in order to avoid having an overall profit, which is subject to capital gains tax.
When NOT to Sell
Now, before you start selling that investment, think about whether you’re pursuing a realistic investment goal and whether that goal still falls within your risk tolerance level. There are many valid reasons for you not to sell.
You are Reacting to Poor Performance
Before you sell an investment, check whether you’re only reacting to a poor quarter or a rough year. Because if that’s the case, you shouldn’t sell.
Assuming that you have done your due diligence and you find that your investment is sound, remember that bad quarters are times when it’s good to buy more. Slumps in the price of good companies can be due to a lot of factors other than the company’s performance.
You are Unloading Inherited Investments
Another not-so-good reason to sell is to unload inherited investments. For investors, it’s common to feel harshly towards these investments because they weren’t the ones who picked them in the first place.
However, when you inherit shares, the previous capital gains are wiped out, which means that you still have a tax-free source of capital that you paid nothing for—even if they remain stagnant.
If these inherited investments fall in value, you get a tax write-off along with the capital from selling them. If they rise in value, what could you complain about? Hold on to these inherited shares until you need them or until you can pass them on.