How to Determine When It’s Time to Sell Investments

Paul Fain, CFP^®

We have quite a bit of deferred maintenance due at our home (painting, replacing windows, carpentry, etc.). To get some projects going, should we borrow the money, use some of our cash reserves, or sell an investment?

I really do not want to take on debt, so that leaves us with the options to draw out some savings or to sell something in our portfolio.

Honestly, I am fond of our cash reserve. It represents peace of mind, flexibility, and even opportunity when markets tumble. And, let’s face it, the world seems a tad crazy these days. Uncertainty feels like the new normal. Cash reserves create a sense of independence from the crazy.

OK then, what to sell? We have some performance laggards in our investment portfolio, including a real estate fund, several international stock funds, and several bond funds. But short-term performance does not negate the rationale for holding these positions to begin with. They are part of a thoughtful, researched, diversified investment strategy. The overarching objective of diversification is to smooth out a portfolio’s risk/reward experience. We want to generate enough return on investment to fulfill our life goals, but we are not willing to bet on the proverbial farm to get there.

The what-to-sell decision is easier when you have bad actors in your portfolio. For example, when an investment is consistently lagging in performance relative to its comparable peers, raising fees, generating tax inefficiencies, or making questionable changes to its leadership or mission.

Also, the what-to-sell decision is easier when your portfolio is imbalanced in its structure. Often, without periodic review and rebalancing, an appropriate portfolio mix can organically evolve into an inappropriate mix. For example, a 50% stock allocation can grow into a 70% stock allocation and carry more market risk than an investor really is comfortable with. Selling some stock holdings would make sense.

Looking through the performance of our holdings, unrealized capital gains and losses, and comparing our current asset allocation to our target asset allocation, I see a sale candidate. Our S&P 500 index fund has performed well and has strong gains. Under the wisdom of “buy low, sell high,” in my next rebalancing review, I might ordinarily be selling some of this fund to buy some of the aforementioned “laggards.” Instead, I might move the proceeds into cash to fund housing updates. A plan is shaping up.

Of course, if we choose to liquidate part of this position, we will owe long-term capital gains tax (but that is a good “problem” to have). Godspeed and good planning.

This article originally appeared in the Knoxville News Sentinel online on June 28, 2024.