When the S&P 500, the Nasdaq, and other benchmark indexes plummet by more than 20% from their recent highs, it’s natural to wonder if it’s time to sell your stocks. For the most part, buy-and-hold investing is the best approach, but there are some good reasons to sell your stocks, even during a bear market.
- Change in investment thesis
- Financial needs
- Asset rebalancing
You can’t simply sell stocks because the price went down, as this is not a good reason to sell on its own. In a bear market, the classic “panic-selling” logic of “I’d better get out before things get any worse” is a bad idea, as it can lead to poor investment performance and missed opportunities for a rebound. Instead, consider the following reasons to sell your stocks in a bear market:
Change in investment thesis
Perhaps the best reason to sell a stock is if your investment thesis is no longer valid. For example, if you bought a company because of its dominant market share, but it starts losing share to a fast-growing competitor, it may be time to reconsider your investment.
- Rock-solid balance sheet and management team suddenly takes on billions in new debt
- Industry disruption due to technological advancements or regulatory changes
- Management team’s change in strategy or leadership
If your investment thesis is busted, it can be a good reason to take your capital and move on to other opportunities. Financial needs
Another reason to sell your stocks is if you need the money. Ideally, you’ll plan for financial needs several years ahead of time, and it’s generally best to avoid selling stocks in the stock market when you need the money. However, it’s not always possible to anticipate financial needs, especially in unfortunate circumstances.
- Job loss or unemployment
- Inflationary environments
- Medical emergencies or other financial shocks
If you need the money, it’s essential to prioritize your financial needs over any investment goals. Asset rebalancing
According to the Rule of 110, the percentage of your portfolio that should be in stocks decreases with age. For example, if you’re 40, you should maintain a 70% stock and 30% fixed-income portfolio.
- Assume you have $70,000 in stocks and $30,000 in fixed-income investments
- Market crash: your stocks fall by 25%, and you’re left with $52,500 in stocks and $30,000 in bonds
- Asset rebalancing: you need to bring your asset allocation in line with your target
- Sell some fixed-income investments and roll the capital into stocks
In this simplified scenario, selling some fixed-income investments and rolling the capital into stocks can be a good idea to bring your asset allocation back in line with your target. One bad reason to sell
In a bear market, avoiding the bad reasons to sell stocks is crucial. Selling stocks simply because the price went down is not a good reason to sell on its own.
- Selling stocks just because the price went down
- Panic-selling logic of “I’d better get out before things get any worse”
This classic “panic-selling” logic can lead to poor investment performance and missed opportunities for a rebound. Tax-loss harvesting
Some investors mistakenly believe that selling stocks just for the tax benefits is a good reason to sell in a down market. Tax-loss harvesting allows you to use any investment losses to offset any capital gains you have for the year.
- Offset capital gains with investment losses
- Reduce taxable income
However, tax-loss harvesting should be viewed as a silver lining of selling stocks at a loss, not as the initial reason for selling. If your investment thesis remains intact and you don’t have any other good reason to sell, don’t sell beaten-down stocks just for the tax benefits. In conclusion, selling stocks in a bear market requires careful consideration. While there are good reasons to sell your stocks, such as a change in investment thesis, financial needs, and asset rebalancing, there are also bad reasons to sell, such as panic-selling logic and selling stocks for tax benefits. By avoiding the bad reasons and using the good reasons, you can make informed decisions about your investments during a bear market.
