Course 304: Strategies for Selling
When to Sell and Accept the Tax Consequences
In this course
1 Introduction
2 Just How Big a Gain Are You Looking At?
3 When to Sell and Accept the Tax Consequences
4 When to Think About Waiting

Many investors find that their need to sell overrides any tax issues. Here are some cases where going ahead and selling is probably the best option:

If you've held the security for at least one year. If you've held the security that you want to sell for at least one year, you're eligible for long-term capital-gains rates. Long-term capital gains are taxed at a lower rate for most investors; see the IRS's web site for current rates. Meanwhile short-term gains--or gains made on securities held for less than one year--are taxed at ordinary income tax rates, which are higher.

If you can engage in tax-loss selling elsewhere in your portfolio. Tax-loss selling is a way for investors to manage the amount of taxes that they pay on their investments. In tax-loss selling, you sell investments thathave lostvalue to offset the gains that you're taking on winning investments.

But beware: Selling a losing position to offset gains in a winning investment can be a smart tax decision, but a poor investment decision. If you do tax-related selling, sell investments that you'd likely sell even if taxes weren't an issue.

If you have a long time horizon and can compensate for the tax cost of selling over time. For those with a relatively long time horizon, say 15 years or more, consider selling part or all of your appreciated shares, taking the tax hit, and reinvesting in other securities. Because you have so much time to recoup the money you're losing to taxes, selling may outweigh the tax costs.

If your portfolio is way out of balance because of this investment. You should have an establishedasset mix for your portfolio. How far off is your current allocation from that target because of this security? The farther off you are, the more benefit you'll gain (in terms of risk control) if you sell at least some of your investment.

If the stock or fund really isn't you. Let's say you made a killing on a stock three years ago only to experience a sickening drop this year. You learned thatinvesting in such heated marketsjust isn't for you, no matter how high the highs can be.

The riskier the investment (and that includes "price risk" in overheated markets), the better off you'll be by selling and diversifying away some of that risk.

If you're convinced bad times are ahead. Most investors would agree that it's better to take a gain on an investment than to take a loss.If you just think nothing but losses are in this investment's future, then sell.

Next: When to Think About Waiting >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.