6 reasons to sell an investment — and 2 to hold on

MORE THAN ANY OTHER INVESTING DECISION, finding the right time to let go of an investment can be driven by emotion. If an individual stock, mutual fund or exchange-traded fund has performed well, it can be hard to sell even a portion of your allocation because it feels like you may be giving up potential future gains. FOMO, or fear of missing out, is a big reason many investors hang on longer than perhaps they should.

On the other hand, if an investment has lost ground, you may be reluctant to sell because you won’t be able to recover the value you lost. Selling at a loss feels like defeat, causing you to question why you bought the investment in the first place.

Neither of these impulses is hard to understand, according to Marci McGregor, head of Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. “People become attached to what has earned them wealth,” she says. “And behaviorally, it’s easy to tell yourself, ‘I’ll sell that investment when it gets back to where it was trading before.’”

Yet it’s just as important to have a plan for when to sell an investment as for when to buy one, McGregor adds. “Selling, like buying, is part of the investment process, and it isn’t just about performance.”

Consider these six reasons to sell an investment — more than one may apply

1. It’s time to rebalance.

“It’s really important to rebalance your portfolio regularly, whether you do so on a schedule or related to a larger change in the markets,” McGregor says. For example, if equities have surged while bonds stayed flat, that could shift your target asset allocation — which should be designed to align with your investing goals, risk tolerance and time horizon. If changes in market levels mean that stocks now make up 70% of your portfolio instead of the 60% you targeted, you’ll need to sell some of your stocks or stock funds to restore the balance.

2. Something has changed.

“Significant changes in the outlook for an individual security or a fund could lead to a decision to sell,” McGregor says. That might include a shift in fundamentals — for example, guidance about a company’s future earnings is disappointing.

For funds, there could be a change in direction so that a fund is no longer aligned with the role it was playing in your portfolio. There could have been a change in management, or perhaps the manager’s performance has dipped relative to that of others directing similar funds.

3. The economy has shifted.

“The state of the economy can be really important in assessing an investment and perhaps deciding to sell,” McGregor says. If a possible recession is on the horizon, for example, consumer companies may underperform the market and could be candidates for a sale. Interest rates, too, can make a difference. When rates are high and financing is expensive, small-cap stocks and asset-heavy companies that depend on large capital expenditures could face headwinds.

4. You want to avoid excessive concentration.

This can affect investors who have received shares in a company as part of their compensation or who own stock that has outperformed the market for long periods and has grown to dominate a portfolio.

“Overly concentrated positions bring outsized risk and may need to be trimmed,” McGregor says. “And being too familiar with an investment may give you a bias that’s not justified.”  You could be swayed by your experience rather than the fundamentals, which may have changed.

5. You’re retiring or have a need for cash.

Trimming positions for any of the reasons already mentioned could help you generate cash, either for a large expense, such as a mortgage down payment, or to make sure you have adequate income as you prepare for retirement. Selling assets strategically in anticipation of a need for income can help you avoid having to make a sale when markets may be down.

6. You need a tax loss to offset capital gains.

Selling an investment at a loss may be easier to accept when you know the loss can be used to offset capital gains and may reduce your tax bill. “But don’t sell an investment solely for tax reasons,” McGregor says. Even if the investment has hit a rough patch, consider its prospects and the role it plays in your portfolio. It may be a good idea to talk with both a tax professional and your financial advisor before selling.

Now for the other side: There can also be many reasons not to sell, but these two can be particularly important

1. Your “overvalued” stocks may still have room to grow.

The share price of a stock shouldn’t be viewed in isolation when considering whether to sell. For instance, “many technology companies now seem very expensive relative to historic valuations,” says McGregor. “That might make you think it’s time to sell these stocks and take a profit. But when you consider the big-picture trend of artificial intelligence and other innovations and their potential impact on all industries, you may come to a different conclusion and decide to hang on for a while longer.”

2. It’s important to stay invested.

During broad market corrections, the urge to sell may be hard to resist. “But there has never been a good time to be out of the market,” says McGregor. “If you look at every 15- or 20-year holding period for equities going back to 1979, stocks outperformed cash every single time.”¹

In all these situations, McGregor says, when you’re tempted to sell an investment, it’s critical to keep the larger picture in mind, stick with your investing plan and focus on staying on track toward your goals. If you work with an advisor, in-depth conversations about when to sell are just as important as the conversations you’re likely already having about what to buy.