Clearly Speaking

When should you sell an investment?


Travis L. Dobbs, CFP, is the founder of ClearView Financial, which specializes in providing retirement and legacy planning. Mr. Dobbs is Blount County's only Certified Financial Planner and a proud member of the Million Dollar Round Table. Investment Advisory Services and securities offered through ProEquities, Inc., a registered broker-dealer, and member of NASD & SIPC.

Travis L. Dobbs, CFP, is the founder of ClearView Financial, which specializes in providing retirement and legacy planning. Mr. Dobbs is Blount County’s only Certified Financial Planner and a proud member of the Million Dollar Round Table. Investment Advisory Services and securities offered through ProEquities, Inc., a registered broker-dealer, and member of NASD & SIPC.

At certain points in the portfolio management process, you may decide that you should rebalance or even redesign your portfolio. Either choice may require that you sell some or all of your investment holdings. However, you shouldn’t take the decision to sell lightly, and you should carefully consider the timing of any sale. An important part of successful portfolio management is knowing when to sell and when not to. Properly and improperly timed sales can directly affect the overall return you receive from your investments.

General guidelines for when to sell

Generally speaking, it is recommended that you sell a particular investment under one or more of the following conditions:

The investment has performed poorly, well below your expectations. You have either suffered a loss or received a less-than-acceptable level of return. You have every reason to believe it will either continue at that same level or plummet further. In this case, you may feel that selling is the only way you can prevent further losses.

The investment has performed well and exceeded your expectations. It is worth considerably more than you paid for it. You have every reason to believe, however, that it has reached its peak and can only go down. In this case, you may want to sell while the market price is high so as to maximize your gain before the anticipated decline begins.

You need to sell one or more investments to bring the asset distribution in your portfolio back to the original percentages that you decided on when you created the portfolio. It is beneficial from a tax standpoint to sell the investment. This could mean that you can accomplish the sale in a way that avoids or defers capital gains tax.

Guidelines for some specific investments

The preceding points are general guidelines for when to sell. In reality, the timing of a sale will probably depend on factors unique to your own investment. Some of these factors are more obvious than others. For example, you should not sell a certificate of deposit prior to the maturity date because you will then have to pay an early withdrawal penalty. You should not sell long-term government securities with relatively low rates of return until you have held them long enough to realize what you deem a worthwhile gain.

You should time the sale of a fixed-income bond so that you receive the latest interest payment instead of passing the payment on to the buyer. Similarly, don’t sell a large blue chip stock right before an expected quarterly dividend is due. Of course, you should not sell stocks when the market is falling, because prices will be deflated and you will either suffer a loss or realize less of a gain than if you waited for the market to recover. For similar reasons, try not to sell a home or other piece of real estate when the real estate market is in decline.

Other factors involved in when to sell are not so obvious. For example, here are two little-known guidelines for mutual funds: (1) You may want to consider selling when the fund changes its manager, and (2) you should generally sell if the fund underperforms its peer funds in the same category for two consecutive years. With both stocks and mutual funds, depending on your tax bracket, you may want to postpone sales that will have large gains until you have held the investment for more than a year. That way, the gain will be taxable at a flat rate as a capital gain rather than at a potentially higher rate as ordinary income. Also, you may want to put off selling stocks or mutual funds that would trigger gains at the end of a given year until the following tax year, so as to postpone your tax bill.

And, if you have multiple stocks or funds you wish to sell, consider staggering the sales over a period of years in order to spread out the tax burden.

This information is educational in nature and is being provided with the understanding that it is not intended to be interpreted as specific legal or tax advice. Individuals are encouraged to consult with a professional in regards to legal, tax, and/or investment issues.