Reasons You Should Sell Now When The Market Is Down

This week on Friends Talk Financial Planning, we discuss the strategic reasons behind selling stocks during market downturns. Although it seems counterintuitive to sell when the market is down, there are valid reasons for doing so, primarily focused on portfolio rebalancing and tax efficiency.

Rebalancing—adjusting the proportions of different assets in a portfolio—can sometimes require selling stocks that have performed well to buy those that have underperformed, restoring balance. We suggest rebalancing once or twice a year, but also recommend reacting to market changes, such as significant drops, when necessary.

We also discuss tax-loss harvesting, where selling an investment at a loss can provide tax benefits by offsetting capital gains. Tax considerations shouldn't drive all investment decisions, but can play a role when rebalancing or managing concentrated stock positions. It is very important to have a clear, intentional strategy, avoiding impulsive actions, and making tax-efficient decisions. If you need guidance, contact your financial advisor today!

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

-Find us on Facebook: www.facebook.com/friendstalkfinancialplanning

#ACPMemberWisdom #stockmarket #sellstocks #financialplanning #taxplanning

TRANSCRIPT:

John: Bridget, the stock market is down, which means it's a great time to sell. Sound confusing? We're going to tell you why that actually makes sense on this episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. And before we go further about talking about what and when to sell stocks, go ahead and click subscribe. It helps people find us on YouTube. Okay, John, just to be clear, we don't recommend this all the time. Stocks are down to go sell. Actually, we usually take a long-term point of view, but there are things to sell now. Yeah, it's time to sell certain things.

John: It's counterintuitive, right? You don't want to sell low; you want to sell when it's high. That's the whole thing. No, don't sell low. Hang on to things. And so, as we have these conversations, it's sort of antithetical to what you're supposed to do. But there are some reasons for it, and I know that you and I both think similarly at least on a number of these things. But here’s one place that it does make sense to sell. Let's just say we have international stocks and the US Stocks and US stocks go way down.

Now, they're out of balance. Well, to get them back into balance, we have to sell some of these international stocks and put them over here to get them back to even. That sort of thought process. So it's selling really the ones that haven't gone down and buying those other ones. But it feels weird when things are kind of unsettled in the economy and the markets and we come to folks and say, “Listen, we think we should sell this one and buy that one.”

And you go, “Wait a minute. When things are uncertain, why are we selling things?” And it's this idea of getting things back into balance and really what it ends up being when you sort of peel back the onion and look underneath it, is selling the one that's done well and buying at a lower level. But it doesn't feel that way when we sit down and talk about, hey, let's sell some of the stocks in your portfolio for the purposes of rebalancing.

Bridget: Absolutely. I really agree with what you're talking about; it's about rebalancing. How often do you recommend rebalancing? Because rebalancing comes with some costs, and you can kind of go crazy with it. We recommend doing it once a year. That's when we find that there's the most benefit. What are your thoughts there?

John: Yeah, that's a great question. And I'll tell you, I say to people all the time, I wish there was some scientific evidence that told us exactly what the best thing to do was, because I do it. And all the research that I've seen continues to be all over the board. I've actually seen studies that say rebalancing every week produces optimal results, which of course phrases a whole bunch of taps and other complications. I've also seen a study that says rebalancing every five years is better than doing it yearly or some shorter time frame. Wait a minute. For us, it's sort of a mixture of art and science.

We do it twice a year systematically but then we do take a look at it in unique circumstances. And I would suspect that you maybe do too, for instance, when the market back in 2020 went down 18% in six weeks. So we do take a look at it periodically as things have if we have some extreme events over the years. So there's some sort of the science for us. Hey, twice a year, systematically, we're going to have a plan. But then there is some art where we go, listen, once we get off by more than a certain percentage, we'll at least take a look at that and see if it makes some sense to do.

Bridget: And we do a total rebalance once a year, but then we try to set up our plan for the year. So new money's going here. Because you don't necessarily want to sell a lot of stuff and realize capital gains, we try to avoid that. So we'll kind of set up our plan for this is where new money is going to go. And then another time we'll take a look at it is when we're looking at tax loss harvesting, which sometimes we'll do this time of year, if there's a big market event. But more often we look at tax loss harvesting at the end of the year. Now, with tax loss harvesting, you could probably make a big argument for doing it more often than that, but for us, we look at it strategically twice a year.

John: Wow. Yeah. And that to me was the other big aha moment. Hey, selling stocks, we do it in service of rebalancing but also for tax lost harvesting. Just to be clear on what that is, when you invest a certain amount, say I put $100,000 into a mutual fund, and now it's worth $90,000. If I sell that from a tax standpoint, I take a $10,000 loss and can apply it to my tax return. Right. And there's some other math that goes into that, but that's the effect is sort of making some lemonade from lemons sort of thing.

This investment is down, but I can realize a tax benefit. But when we do tax loss harvesting, and I think it's the same for you, if it's a small company, a small cap fund, we sell this one, it feels weird. Wait a minute. This has gone down. Now you're getting out. Are you changing your philosophy? Are you going to cash. No, we're going to sell this small company fund and buy that small company fund. Something that has exposure to the same type of funds, but it's a different investment.

And that way we get a chance to realize that tax loss for the tax return, but we're not changing the mixture of stocks and bonds. We're not getting out. It's not a matter of saying, “We don't like this fund,” or “We don't think this category makes sense.” It's a matter of saying, “Hey, can we rejigger things within that category to generate some tax benefit?”

Bridget: And sometimes, similarly, if clients come in and they've got individual stocks, those are a lot more volatile, but we don't want to sell them because it's not that big of a position. In other words, they don't have that much of it. And they would have to realize capital gains. It’s sort of a neutral in their portfolio as far as we're concerned. Then, if those go down, we'll sell that, then buy what we would usually buy.

John: That's the other great thing. I appreciate that one too. We've got some similar positions. We don’t hate this fund or individual stock, and we don't love it either, but because of the tax hit, there are some things we can do. If it’s $100,000 now, it goes down and our tax gain is lower, maybe it's more palatable to realize that tax gain and make some moves on that. That usually happens for us when we've got new clients that come in and they've got a portfolio that looks like what it looks like.

And you go, hey, in the IRA accounts and the Roth IRA, we can make moves there, no big deal because there's no tax consequences. But golly, in the brokerage account we go, we don't want to just sell everything. And there's a lot of folks in our world that do just take everything, sell it, and put it into their portfolio. We've had clients that have had six figure capital gains unintentionally, and I'm not saying that it's necessarily wrong, but they didn't know this.

Bridget: Right.

John: There are cases where it certainly makes sense to do that, but you have to be intentional and understand where the taxes come from on that.

Bridget: That kind of what I would consider a boneheaded move by advisors is one of the reasons why I got in the industry because when I had my tax practice, I'd see that kind of stuff and think, “Look at how much taxes these people are paying on it. What are you doing?” Just because you want to have your pet funds, you're realizing all these capital gains. I just disagree with that.

John: Yeah. And to me, when there's no intentionality to it, there’s a problem. If you look at it and you go, “Listen, I think this is the best thing to do. Here's the tax consequences. But we're going to do it anyhow.” No problem.

Bridget: Exactly.

John: Okay, great, we can make a decision. But when you have a tax surprise in the spring because you didn't understand what was going on, that's where the problem comes in.

Bridget: We have a client who inherited a bunch of Nvidia. The person who passed away had invested a lot in Nvidia. Even since they inherited it, it has skyrocketed. And so, that's a situation where there's enough of it that we want to sell it anyway. It's a concentrated position. We're not selling it because of taxes or even thinking about taxes. We're selling it because this is too concentrated of a position; they've got too much of this. So I think it's important to realize that you don't really want to have taxes driving all your investment decisions.

John: That's right.

Bridget: So say the taxes are 25% on that and I'm just throwing a number out there. It's easy for the stock market to go down on an individual stock 25% in one day. That happens all the time. So it's important to balance those things. When you have too much of it or we call it in industry jargon (jargon police!), concentrated positions, that's a different situation than a neutral thing that maybe we'd like to get rid of.

John: Yeah, we talk all the time about the allocation policy. Where your money is invested is the first most important thing.

Bridget: Right.

John: And then we try to be as tax efficient as we can within that framework for the reasons you just described. You just reminded me of some situations where we have some of those really concentrated positions, such as a lot of money in one stock relative to the rest of a portfolio. People are familiar with dollar cost averaging by buying the same amount of a stock or mutual fund every month. We've done it on the reverse basis saying, listen, let's dollar cost average out because what if the stock keeps on going up.

Let's just set a plan, and every month we'll take 10% of that and sell it. And then if it goes up, we're going to make some more money and if it goes down, we're cashing out earlier. And that reverse dollar cost averaging and not paying attention to what's going on with the stock or what their earning those things can be very useful. In short, having a plan can be a really effective way of unwinding some of those positions depending on the circumstances.

Bridget: Right. And sometimes it's almost like you have to close your eyes and just do it. It’s like jumping into a pool or something. All right, I see that it’s safe. I'm gonna close my eyes and do my plan.

John: I think that's a great place to wrap up. Again, the markets are down in the US stocks anyway. But there’re some reasons to sell for rebalancing, for eliminating positions, for tax lost harvesting. This is not for getting out and putting it into cash and changing your philosophy but for making your plan more efficient with that. I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients, but we're also members of the Alliance of Comprehensive Planners. And if you want to find an advisor who thinks similarly to us, you can check out acplanners.org.

John: And don’t forget, hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.