The vast majority of financial literature is concerned with when to buy a stock and how to get a deal. The assumption seems to be that the time to sell is self-explanatory. The truth is that selling is just as important and intensive an operation as buying.
In this article, we will look at the main points you should consider when selling an investment.
Reasons to Sell
In general, investors want to offset gains until they can realize them in a lower tax bracket. For example, when you are at your earning prime, investing income will be taxed more stringently than when you are retired. Consequently, there are only a few reasons to sell before that time.
Adjusting Your Portfolio
The most common reason is to adjust your portfolio. There are many reasons that a portfolio might become unbalanced or inappropriate for your investing goals. This could be due to a life event such as marriage, divorce, retirement, the birth of a child or merely an accidental concentration of capital in one sector.
Putting all of your stocks in one sector — or even putting all of your money into a certain risk level of investments — is a dangerous game. Diversifying generally negates the chance that you will lose everything at once, but you have to be careful not to over-diversify, which will hamper your portfolio’s growth. When your portfolio needs to be diversified — or in the case of over-diversification, refocused — the goal is to incur as few fees and taxes as possible while making the changes. We will look at how to do that shortly.
Freeing Up Capital
The other reason to sell an investment is to free up capital. This capital could be needed to make a down payment on a house, finance your new business, pay for major surgery or take a vacation. The best way to free up capital is to realize losses to offset your gains. If you have two investments — one that has experienced gains and another that has suffered losses — you might want to sell them both to avoid having an overall profit that is subject to capital gains tax.
If you really need the money, don’t let taxes keep you from selling. If your only other option is a loan, then you are better off to eat the tax, curse the government and spare yourself years of high-interest debt payments. In terms of raising capital, make sure to calculate how much you will be paying in taxes and fees, and check that you will have the amount you need when all is said and done.
Reasons Not to Sell
Before deciding to sell, think about whether your investment goals are still realistic and within your current risk tolerance levels. There are a number of…