How Do Investors Decide Which Stocks to Sell?

In the vast world of investing, there’s so much emphasis placed on buying stocks: Which investments? When? How much? And, in which account?

The goal of stock investing is to grow your portfolio to fund your future goals. Yet, buying is only half of the process — you’ll still, eventually, need to sell your investments when the time comes to see those goals through to fruition.

The question is, how do you decide which specific stocks to sell at what time — and from which accounts?

Here are a few things to consider when deciding what investments to offload.

Why sell in the first place?

Generally, an investor will sell stock for one of three reasons:

The investment thesis isn’t panning out. When we invest, we’re buying a tiny piece of a business because we believe that business has the potential to grow and earn us a return on our investment. When that thesis doesn’t pan out for whatever reason, and there isn’t a new thesis that predicts growth, it’s time to cut bait and find an investment that we think has a more promising thesis.

Market conditions make the investor feel nervous. Investors are susceptible to making emotionally charged decisions based on what’s happening in the markets or the broader economy. A sudden downturn, for example, can incite fear or panic and result in a mass sell-off of stocks. Alternatively, a spike in performance can create FOMO (“fear of missing out”) and influence investors to purchase impulsively — think the next big “hot stock.”

They need access to the funds. The final reason is really what we’re focusing on here: selling stock to pay for a life event such as college tuition, a child’s wedding, a new house, retirement, or even investing in something with greater potential for returns. The entire point of investing is to build wealth over time to support certain goals. So when the time comes to fulfill those goals, how do investors decide which portion of their portfolio gets converted into cash?

While there’s no right or wrong way to select which stocks to sell, there are a few considerations that can help you determine what may be best for your portfolio and unique circumstances.

First, look at the general tax consequences

Your investments will have different tax consequences based on what you sell and from which account. Understanding the tax consequences ahead of time can help you both minimize them and account for them, so you have sufficient funds to meet your immediate needs.

Account type

Certain accounts are designed to help people save for something specific like retirement, college tuition, or healthcare costs. To incentivize people to use the accounts for their intended purposes, they often come with a tax advantage.

A 401(k), for example, is tax-deferred, meaning your contributions can reduce your taxable income for the year they’re made and earnings within the account aren’t taxed until funds are withdrawn (presumably in retirement).

When it comes time to sell stock, consider first which account type makes the most sense to tap into. If you’re below retirement age, for example, withdrawing from your retirement accounts may result in a tax penalty. You may need to turn to your taxable brokerage account instead.

Capital gains

If you sell an investment for more than you initially bought it for (called the asset’s basis), you may be required to pay capital gains tax on the profit.

Capital gains tax is determined by two factors: how long you held the asset before selling it, and your income level. If you own the asset for less than a year, your profits may be subject to short-term capital gains tax, which is based on your tax bracket. Anything held for more than a year would be taxed at the long-term capital gains tax — which will vary depending on tax filing status and income, but doesn’t exceed 20%.¹

If you have a choice, selling holdings you’ve owned for over a year is usually more advantageous than selling holdings you’ve owned for less than a year.

Capital losses

If your investment has lost value since you bought it, it would experience a capital loss. When you sell an investment at a loss, you can use those losses to help offset the capital gains of other investments. This strategy is called tax-loss harvesting, and it can be an effective way to mitigate your tax liability throughout the year—especially if you’re selling a significant amount of stock from your taxable accounts. 

While tax-loss harvesting can help you save on taxes, that doesn’t mean you’re always better off selling poor-performing stocks when you need cash. Investing is about the long game, and it can reward those who are patient. Just because a stock’s value is down today doesn’t mean it's impossible for it to skyrocket tomorrow. Rather, think of tax-loss harvesting as just one tax-focused factor that can play a part in your decision.

Which to ditch: Winners or losers?

With an understanding of how taxes may play a role in your decision, the next question is… Should you sell off those stocks that are performing well, or those that aren’t? 

Unfortunately, there’s no clear answer here.

But it may help to shift your perspective a bit. Considering your holdings as either “winners” or “losers” means basing your opinion on past performance — and one of the basic tenets of investing is that past performance does not guarantee future results.

Instead, try to think about which of your holdings has the most and least potential for optimal performance moving forward. You’ll want to let those with the most potential keep running, whether or not they’ve performed to date.

Categories to consider

With all of the above in mind, here are some categories of investments you might consider when it comes time to sell.

Investments whose thesis has played out.

You may have a winner in your portfolio that’s far outperformed past projections, but you believe that, eventually, it’s going to run out of steam. Maybe it’s already shown signs of slowing down. If the upside from here seems limited, it’s a candidate for raising funds.

Investments whose thesis hasn’t played out — and probably won’t.

You may have some stocks in your portfolio that never really performed well over time and didn’t live up to your thesis. At this point, you’re not seeing upside. Now that you need the money, you might as well use this opportunity to cut your losses and clean house.

Winners that have taken over.

Maybe you’ve had a fantastic investment that has grown at such a pace that it’s now become overweighted in your portfolio. If one particular stock or sector starts to take up a disproportionate amount of space in your portfolio, it impacts your exposure to risk. Selling off some of the high-performing stock can help bring more balance back to your portfolio, while simultaneously fulfilling your need for cash.

Selling stock soon?

Ultimately, it’s important to base your decision on current asset allocations and your own investment theses, whether the underlying stocks are “winners” or “losers.” Understanding the tax consequences of each account can also help inform your plan of action and reduce the risk of a surprise tax bill in April.