Selling high is a basic tenet of successful investing, so it doesn’t take an investment wizard to know that it’s rarely smart to sell during a downturn. But an article in Morningstar gives 4 good reasons why it might be a good idea for investors to offload right now.
With some investors prone to panic-selling, the advice to stay the course during a volatile market is sound. But that assumes that the original investment plan was well-laid-out. With the outperformance of U.S. stocks over the past decade, a typical 60/40 portfolio from 5 years ago would be more like 72/28 today. If an investor didn’t rebalance and finds themselves in one of the 4 situations listed, selling stocks might be a good idea right now.
- You’re close to retirement and are in need of de-risking. Even investors with a tolerance for risk may find the need to reduce it as their investment plan’s ability to absorb risk diminishes over time. If your portfolio is equity-heavy, building out positions in cash and bonds could act as shield against a bad market, especially if it occurs early in retirement. Morningstar recommends holding 10 years’ worth of spending in cash and bonds; the more balanced portfolios tend to support higher withdrawal rates than those weighted toward equity.
- Your investment goals are short-term. Many of the new investors entering the market are young, and living paycheck to paycheck. Those investors probably aren’t hyper-focused on retirement investing; rather, they’re focused on possible milestones in the next few years, such as buying a house or starting a family, or using their portfolios in case of emergency. Short-term investments can be risky, and new investors with too much risk should take advantage of U.S. stocks still being up more than 10% by liquidating equity holdings in favor of a balanced portfolio that addresses the need for liquid assets to fall back on should the occasion arise.
- You’ll panic-sell if the market gets worse. Even if an investor has a long time to hold onto stocks, there’s always the chance that they’ll capitulate during a downturn and sell themselves out of stocks, resulting in real losses. If you’re feeling spooked by recent volatility, lightening up on stocks and adding in more bonds and cash would help balance a portfolio. Additionally, making sure an equity portfolio is balanced between value and growth stocks, as well as between non-U.S. and U.S. stocks, could instill some calm in order to face the rough seas that are undoubtedly ahead.
- You have tax losses. In very specific cases, an investor that bought securities for their taxable accounts that have now declined, it might be beneficial to sell in order to harvest a tax loss. That loss can then be utilized to offset capital gains. However, keep in mind that if you repurchase a “substantially identical” security within 60 days of selling, you’ll forfeit the tax loss.