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You can and should hold good investments for years and decades. Here are some issues to consider when you contemplate selling your investments.
Remembering your personal preferences and goals
If you've inherited investments or your life has changed, your current portfolio may no longer make sense for you. The time that it takes you to manage your portfolio, for example, is a vital matter if you're starved for time or weary of managing time-consuming investments.
Maintaining balance in your overall portfolio
A good reason to sell an investment is to allow you to better diversify your portfolio. Sell off some of the holdings that you have too much of and invest the proceeds in solid investments. If you think that your employer's stock is going to be a superior investment, holding a big chunk is your gamble.
Deciding which investments are keepers
Often, people are tempted to sell an investment for the wrong reasons. One natural human tendency is to want to sell investments that have declined in value. Some people fear a further fall, and they don't want to be affiliated with a loser, especially when money is involved.
 | Step back, take some deep breaths, and examine the merits of the investment you're considering selling. If an investment is otherwise still sound, why bail out when prices are down and a sale is going on? What are you going to do with the money? If anything, you should be contemplating buying more of such an investment. Don't make a decision to sell based on your current emotional response, especially to recent news events. If bad news has recently hit, it's already old news. Don't base your investment holdings on such transitory events. |
Tuning in to the tax consequences
When you sell investments that you hold outside a tax-sheltered retirement account, such as an IRA or a 401(k), taxes should be one factor in your decision. If the investments are inside retirement accounts, taxes aren't an issue because the accounts are sheltered from taxation, unless you're withdrawing funds from the accounts.
With stocks and mutual funds, things get more complex because you can specify which shares you want to sell. This option makes selling decisions more complicated, but you may want to consider specifying what shares you're selling because you may be able to save taxes. If you sell all your shares of a particular security that you own, you need not concern yourself with specifying which shares you're selling.
Figuring out which shares cost you more
When you sell a portion of the shares of a security (for example, stock, bond, or mutual fund) that you own, specifying which shares you're selling may benefit you tax-wise. Here's an example to show you why you may want to specify selling certain shares — especially those shares that cost you more to buy — so that you can save on your taxes.
Suppose that you own a total of 300 shares of a stock and you want to sell 100 shares to pay for a root canal. Suppose further that you bought 100 of these shares a long, long time ago at $10 per share, 100 shares two years ago at $16 per share, and the last 100 shares one year ago at $14 per share. Today the stock is at $20 per share. Although you didn't get rich, you're grateful that you haven't lost your shirt the way some of your stock-picking pals have.
The good tax folks at the IRS allow you to choose which shares you want to sell. Electing to sell the 100 shares that you purchased at the highest price — in other words, those that you bought for $16 per share two years ago — saves you in taxes. (To comply with the tax laws, you must identify the shares that you want the broker to sell by the original date of purchase and/or the cost when you sell the shares. The brokerage firm through which you sell the stock should include this information on the confirmation slip that you receive for the sale.)
The other method of accounting for which shares are sold is the method that the IRS forces you to use if you don't specify before the sale which shares you want to sell — the first-in-first-out (FIFO) method. FIFO means that the first shares that you sell are simply the first shares that you bought. Not surprisingly, because most stocks appreciate over time, the FIFO method leads to you paying more tax sooner. The FIFO accounting procedure leads to the conclusion that the 100 shares you sell are the 100 that you bought long, long ago at $10 per share. Thus, you owe a larger amount of taxes than if you sold the higher-cost shares under the specification method.
 | Although you save taxes today if you specify selling the shares that you bought more recently at a higher price, remember that when you finally sell the other shares, you'll then owe taxes on the larger profit. The longer you expect to hold these other shares, the greater the value you'll likely derive from postponing, realizing the larger gains and paying more in taxes. If you expect your tax rate to decline in the future, you have another good reason to hold off selling the shares in which you have greater profit. |
Selling investments with hefty profits
Of course, no one likes to pay taxes, but if an investment you own has appreciated in value, someday you'll have to pay tax when you sell it, unless you plan on passing the investment to your heirs upon your death. The IRS wipes out the capital gains tax on appreciated assets at your death.
Capital gains tax applies when you sell an investment at a higher price than you paid for it. Your capital gains tax rate is different than the tax rate that you pay on ordinary income (such as from employment earnings or interest on bank savings accounts).
Odds are, the longer you've held securities such as stocks, the greater the capital gain you'll have, because stocks tend to appreciate over time. If all your assets have appreciated greatly, you may resist selling to avoid taxes. However, if you need money for a major purchase, sell what you need and pay the tax. Even if you have to pay state as well as federal taxes totaling some 35 percent of the profit, you'll have lots left. Before you sell, however, do some rough figuring to make sure that you'll have enough money left to accomplish what you want. If you seek to sell one investment and reinvest in another, you'll owe tax on the profit unless you're selling and rebuying real estate.
| If you hold a number of assets, in order to diversify and meet your other financial goals, give preference to selling your largest holdings with the smallest capital gains. If you have some securities that have profits and some with losses, you can sell some of each in order to offset the profits with the losses. |
Recognizing that all brokers are not created equal
If you're selling securities such as stocks and bonds, you need to know that some brokers charge more — in some cases lots more — to sell. Even if the securities that you want to sell currently reside at a high-cost brokerage firm, you can transfer them to a discount brokerage firm.
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