Should you sell your stocks?

Do you own some stocks and bonds in your portfolio? Regular readers may know that I discourage investing in individual stocks and bonds as the lack of diversification is detrimental to your financial health. Instead, I advocate low-cost index funds for everyone.

However, there’s lots of reasons you may have some. Perhaps, you:

  • purchased them based on your cousin or CNBC’s hot tip
  • inherited them
  • received them in a divorce settlement
  • were recommended to do so by a financial advisor
  • were granted shares in your employer’s company

Is it time to sell them? Maybe.

It’s easy to suggest that you shouldn’t buy individual stocks and bonds but it’s not as simple to advise you to sell them all now. Why not? Mostly because taxes can complicate things but also, in the case of bonds, they’re usually illiquid and difficult to sell at a fair price. Let’s look at three scenarios:

  • owning bonds in any account
  • owning stocks in a retirement account
  • owning stocks in a taxable account

Owning Bonds

If you own bonds or other types of fixed income securities, I generally recommend you do not sell them. Most fixed income securities (US Treasury bonds are an exception) don’t have a liquid secondary market. Yes, you can sell them but, you’ll likely get a slightly discounted price that doesn’t fully reflect the current market value. Instead, you’re usually better off holding on to them and continuing to collect the interest payments. This is one reason I advocate for bond mutual funds instead of owning individual bonds — you have much better liquidity.

As with your teenage kids, bonds eventually mature and when they do, they are automatically redeemed by the issuer. In that case, you don’t need to do anything and you’ll receive the full redemption value at that time. While you remain undiversified for a period of time, this is the most cost-efficient way to end your investment.

Owning Stocks in a Retirement Account

This one’s easy. Sell 100% of any stocks that you own inside of an IRA or similar retirement account. Why? There’s no tax consequence for doing so and if you listen to me, you’ll reinvest the proceeds in a low-cost index (or target date) fund and reap the full benefits of diversification.

I see no reason to own individual stocks in a retirement account. You’re incurring excess risk without the benefit of excess returns.

Owning Stocks in a Taxable Account

This is the toughest situation for which there is no uniform answer. You may have a significant portion of your net worth tied up in a relatively small number of stocks. Furthermore, these stocks may have been acquired years ago and have a low tax basis. Thus, if/when they are sold, you may owe significant capital gains taxes.

Admittedly, there are worse problems in life but no one wants to pay more tax than is necessary. To complicate it a bit further, if you were to die not having sold these stocks, then your heir(s) would inherit them with a “stepped-up basis” and no one would pay those unrealized capital gains.

What to do? It’s situation-specific and depends on a few factors:

  • How big are these positions relative to your total net worth?
  • How imbalanced is your overall asset allocation due to these individual holdings?
  • How large are the unrealized capital gains?
  • What are your current and future tax brackets?
  • Do you need the money to live on now or in the future?
  • Lastly, what are your intentions for charitable contributions?

The answers to all these questions influence how much, if any of the positions should be sold now, later, retained indefinitely, or contributed to charity. It’s a balancing act between reducing investment risk versus paying more tax.

The easiest way to avoid this problem is to stick to low-cost index funds, politely ignore the hot tips from your cousin, and if you get divorced, tell your ex-spouse to keep the stocks that s/he was so insistent on buying at the time and you’ll keep the index funds.

Questions?  Get in touch

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