If you actively managed your own investment portfolio (or a portion of it), odds are you’ve wrestled with this question at some point. I talked with a few clients this week about sell decisions (with various characteristics) and wanted to cover some of the highlights here

Evaluate Reason to Sell

Before taking any action, first evaluate why it is you are thinking of selling. This is a good initial “check” to see if the decision is rational or reactionary. Knowing why you are acting (and checking your emotions) can help minimize any future regret or angst. For instance, considering selling/trimming a position to raise cash for living expenses, reduce a concentration, pre-fund an upcoming expense, pull back weight after a marked run-up in the security, or as part of rebalancing to your target allocation, are all reasons that pass the initial “gut check.” If you are selling solely because the market is down and doing so would abandon your target asset allocation, consider taking a breath and thinking about it some more

Material Gain Positions & Regret Minimization

It can be hard to sell an investment – especially those that have done really well. Why? Because it’s hard to know if there is more good news to come! When clients are dealing with superstar positions that need to be trimmed (to reduce concentration risk), I like to ask this question – what mistake will you feel the best about making? Selling and having it go up more – or holding it as is and watching it fall? I have no idea which scenario will come to pass (neither does anyone else) but the position is going to move one of two ways over time. Trying to put yourself into a future state and deciding which outcome will be the least painful (minimizing future regret) can be helpful.

Loss Positions & “Break Even Fallacy”

Loss positions can also be hard to trim/sell. Sure, you may be able to lock in a tax loss (in a taxable account) but psychologically, there can be a belief that you should just hold the position until it gets back to break even and then sell it. Warren Buffett famously said you don’t have to make money back the same way you lost it – and that definitely applies to loss positions. If you own an investment in a loss position and you hold it, you’re essentially saying you would buy it again at today’s price (since you’re not selling, it’s akin to buying it today). If the investment thesis has changed – and more importantly, if there is a better vehicle for the funds to get you back “above water,” – sell it and move on. Investing is the sum of countless right decisions- not one (or a few) mistakes.

Tax Impact

There is a very real cost tied to the generation of capital gains (selling positions in a taxable account for more than you paid for them). I will never argue that fact. However, it’s important to remember there can also be costs to holding positions indefinitely (such as concentration risk in a single position, over exposure to sectors, imbalances against target allocation, and insufficient cash reserves for upcoming expenses to name a few). When deciding if/when to sell a position that will generate a capital gain, be sure to weigh all potential costs including taxes. This can be hard as many of the potential costs are unknown but do your best. You can also consider ways to offset gains, such as taking any available losses or using positions with material capital gains to fund charitable donations

As you can see above, selling is not an easy endeavor. Hopefully these few scenarios help you the next time you are faced with this challenging task!