Opinion: Selling lucrative stocks in a bull market is a tough decision, but you’ll thank yourself when the bears take matters into their own hands

It’s human nature that when things are going well, we tend to postpone basic maintenance. Who hasn’t let more than six months go by between dental visits or traveled more than 5,000 miles between oil changes?

The same often happens with our investment portfolios. When the stock market moves like gangbusters, we tend to think that the good times will never end.

And why tinker with success? After all, the S&P 500 SPX,
-0.26%
reached over 50 records in 2021 alone. Some of the bigger stocks continue to grow faster. It took almost 40 years for Apple AAPL,
-0.35%
become the # 1 trillion dollar company in terms of market capitalization. It hit that plateau in 2018 and only took two more years to reach a value of $ 2 trillion. Nowadays, Microsoft MSFT,
-0.88%,
Alphabet (Google) GOOGL,
-0.92%,
Amazon.com AMZN,
-1.14%,
Tesla TSLA,
-1.27%
and Meta Platforms (Facebook) FB,
-2.33%
have also joined the trillion dollar club.

But at some point the music will stop. Inflation is expected to continue into 2022 and beyond. In response, the Federal Reserve is expected to raise short-term interest rates several times over the next year, making it more expensive for consumers to borrow money for large purchases and for businesses already struggling with it. extremely slim profit margins. Nervous investors may sell off some of their stocks to reduce their exposure to stocks.

Should we do the same? It depends on whether your portfolio follows an asset allocation strategy with a targeted mix of investments in stocks, bonds and cash that reflects your savings goals, timing and tolerance for risk. Even if it does, at some point you’ll want to adjust it using a sensible portfolio rebalancing strategy.

Rebalance now for the coming year

Why is a rebalancing necessary? Because over time, asset weights get out of sync as values ​​move up and down. For example, divide the value of stocks held in your investment account by the total value of the account. The result will be its current percentage of shares. In this bull market, there is a good chance that the percentage is higher than you expected.

Among investment professionals, this is called “overweighting”. While this can lead to impressive returns when the market is hot, overweighting a predetermined asset allocation exposes you to greater losses in the event of a sell-off.

The time to think about rebalancing is not when the market is going through wild gyrations. If a financial advisor manages your account, your account will generally be rebalanced each year, at the end of the year and at the start of a new year.

If you want to rebalance yourself, check your latest account statements. Determine how much you might need to sell of your equity holdings to restore your target weightings.

If you think the stock market has a lot more upside potential, you might want to keep your equity allocation a little higher. Conversely, if you are about to retire and are concerned about eroding the value of your retirement nest egg, you can change your asset allocation to a more conservative combination, like 50% bonds. , 40% shares and 10% cash.

Beyond percentages, you’ll also want to look “under the hood” of the portfolio to identify some issues that, if left unaddressed, could negatively impact the effectiveness of your investment.

Reduce exposure to Big Tech

In terms of market capitalization, let’s go back to these five biggest American companies – Facebook, Apple, Alphabet (Google), Microsoft and Amazon. These five represent 20% of the entire S&P 500 and 40% of the NASDAQ COMP Composite Index,
-0.61%.

If you invest in an S&P 500 index fund or ETF or more actively managed large cap funds, you will likely see these tech stocks at the top of their holdings lists. If you own more than one of these funds, it means that a large portion of your shares are concentrated in these companies.

What if one or more of them has a hard time or if government regulators decide to change or break their business models?

Selling some of these large-cap equity funds as part of your rebalancing strategy and reinvesting the proceeds in bonds can reduce your exposure to Big Tech while restoring your target weightings. You can also consider selling a little more and investing in small to mid-cap funds, which don’t invest in giant tech stocks.

It can also be a good time to review capital spending. If the fees charged by your funds are not justified by their poor performance, consider moving that money to lower cost index funds and ETFs.

Don’t forget about taxes

If you are rebalancing in a taxable account, you will need to pay special attention to capital gains resulting from the sale of a stock, bond, or fund at a profit. If you sell any of these securities after holding them for less than a year, the profits will be taxed as ordinary income. If you hold them for more than a year, you’ll have to pay long-term capital gains taxes, which can be as high as 20% depending on your adjusted gross income.

To help reduce the tax consequences, see if you can take advantage of a strategy the pros call tax-loss harvesting. It simply means selling shares of a security or fund that you have lost money on to generate capital losses that you can use to reduce capital gains when you sell other investments at a profit.

It’s relatively easy to do with stocks. This is more difficult to do with mutual funds and ETFs because the calculation of the cost base (what you paid for the stocks) is not always clear. There are several strategies you can use to potentially increase your cost base, but they are complicated and require a lot of homework to do properly.

If you feel that you can’t make these decisions on your own, consider partnering with an experienced, paid-only advisor who is legally bound to act in your best interests. They can analyze your current portfolio and asset allocation strategy, identify risks of overweighting and overconcentration, audit investment costs and recommend actions that can restore optimal balance in a more profitable and tax efficient manner. .

Pam Krueger is the creator and host of the award-winning show MoneyTrack nationally seen investor education television series on PBS. She is also the founder and CEO of Wealthramp.com, an SEC-registered advisor matchmaking platform that connects consumers with licensed and qualified financial advisers.

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