What to do if you need to sell stocks urgently
When stocks are volatile, conventional wisdom says to stay the course. But what if you have tuition due or a pending home purchase and you just really need to cash out?
Even the experts can get caught unprepared
That is a lesson Jenny Van Leeuwen Harrington learned when she and her husband were planning to buy a house nearly 20 years ago. As a portfolio manager, Harrington was trying to sell stocks at the last possible moment to maximise gains. She was waiting in bed on the morning of September 11, 2001, for the markets to open. And then, of course, time stopped.
“When the markets reopened a few days later, they were down a huge per cent. I took a bath,” said Harrington, now CEO at Gilman Hill Asset Management in New York.
Her takeaway: Do not mess around.
If you need to cash out of investments right now, while stocks are likely to be on a wild ride, here are some things to consider:
Plan ahead, even a little bit
Ideally, if you have a big, scheduled payment coming up, you would plan ahead and move money from stocks to a high-yield money market account or other safer investments. “The longer runway you have, the safer you will be when you have to take the money out,” said Corbin Blackwell, a certified financial planner with Betterment, an online wealth management firm.
Eighteen months to a year is ideal, but sometimes that can stretch longer. Financial planner Erika Safran, who has her own firm in New York, has clients who have kept cash sitting around for two-and-a-half years now, waiting to find their dream home.
Even a few weeks can do the trick. If you are facing a situation like a pressing tuition fee, you could sell a third of the shares you need 10 days prior, then another third a few days after that and the remainder a few days before the deadline, according to JJ Kinahan, chief market strategist at TD Ameritrade.
You can also make selling decisions based on the balance you need, Kinahan said. So if tuition is $30,000 (Sh3 million), sell shares for half the amount a few months before, and then set high and low limits for selling the rest.
Choose carefully what to sell
Not all stocks in your investment portfolio are the same, so when you go to sell, do thorough research. Harrington spoke to a client this week who is raising cash. The client had three buckets to choose from with different tax implications.
For the most part, if you want to minimise capital gains, sell the stock with the least embedded growth.
When it comes to exchange-traded funds, your holdings might have a different cost basis if you bought shares over time.
“You need to call and say ‘I want to sell my highest-cost position so I can minimise taxes,’” said Harrington.
Consider selling bonds at the moment instead of stocks, said Bill Northey, senior investment director for U.S. Bank Wealth Management. For that matter, look at alternatives like a home equity loan or portfolio line of credit to avoid selling altogether, Northey added.
Be at peace
Even with shares dropping it is not actually such an inopportune time to sell. You might not even be taking a loss, despite the headlines in the papers, because your cost basis could be much lower than today’s price, for example.
“Keeping proper perspective is important despite the headlines,” Northey said.
And remember that a 2 per cent drop or rise in a day sounds dramatic, but it could be minimal on your actual investments. One of Harrington’s clients said she needs $20,000 (Sh2 million) to pay her granddaughter’s college tuition and wants to know when to sell. A market move of 2 per cent up or down equals loss or gain of about $400 (Sh40,000) for her.
“Bottom-line, once you know the number, get it done,” Harrington said.
This is an abridged version to a story by Reuters.