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4 Tips for Selling in a Down Market

When markets take a dive, the last thing you want to do is sell at depressed prices—but sometimes you have no choice. A medical or tax bill could be due, or you may simply need to replenish your cash reserves.

Whatever the reason, there are ways for cash-strapped investors to minimize the impact on both their portfolios and their long-term investing goals.

“The important thing is to make strategic decisions rather than emotional ones,” says Mark Riepe, head of the Schwab Center for Financial Research. “If you don’t, you could end up locking in losses and may run the risk of permanently undermining your portfolio’s ability to recover.”

With that in mind, here are four strategies for selling in a down market.

1. Rebalance your portfolio

Periodically rebalancing your portfolio—which involves selling overweight positions and buying underweight ones to keep your portfolio in line with its target asset allocation—is a good idea in the best of times. But when the going gets tough, it can also help you make dispassionate decisions that can lead to better outcomes.

“The recent market turbulence likely threw your portfolio out of whack,” Mark says. “By refocusing on bringing your portfolio back to its target allocation, you can more easily identify those assets you’d probably want to sell anyway.” For example:

A. Imagine an investor with a $500,000 portfolio and a target allocation of 60% stocks, 35% bonds, and 5% cash investments. After a rough few months, the stock portion of his portfolio falls by $75,000:

B. At the same time, the investor needs to withdraw $15,000 from his investment portfolio to cover an unexpected bill. To figure out what to sell in order to meet his cash need, the investor should:

1. Subtract his cash need from his current portfolio balance:

Current portfolio balance: $425,000
Cash need: –$15,000
New portfolio balance: $410,000

 

2. Use his new portfolio balance and target allocation percentages to determine his target dollar amounts for stocks, bonds, and cash investments. “Interestingly,” Mark says, “to achieve his target asset allocation, our hypothetical investor actually needs to buy more stocks—presumably at lower prices, which should work in his favor should the market turn around.” After selling overweight positions and buying underweight ones, the investor can use the remaining cash proceeds to pay his unexpected bill:

2. Take out the trash

Once you’ve figured out which asset classes to sell, it’s time to identify individual investments to offload. The place to start is holdings with weak prospects or that no longer match your goals. “If you wouldn’t consider buying more of a particular investment today, then you should seriously consider selling it,” Mark says.

To assess the merits of an exchange-traded fund or a mutual fund, check that its investment strategy still matches your goals and its recent performance is in line with your expectations.

To assess the merits of an individual stock, check out the underlying company’s earnings and balance sheet for signs of weakness—or use Schwab Equity Ratings® to get a sense of a stock’s prospects. “Don’t be sentimental,” Mark says. “Even if a stock has performed well for you in the past, that doesn’t mean it will continue to do so in the future.”

3. Harvest some losses

If you need to sell more after offloading investments that no longer match your goals, it’s time to realize some losses.

Selling for a loss is never easy, but sometimes it can actually work in your favor. That’s because you can use those losses to offset gains you may have realized in your taxable accounts over the course of the year, which can help reduce your tax liability—a strategy known as tax-loss harvesting (see “Using a tax loss to get a tax break,” below).


Using a tax loss to get a tax break
A hypothetical investor who realized $10,000 in short-term capital gains and $15,000 in capital losses could use tax-loss harvesting to cut down her tax bill.

Source: Schwab Center for Financial Research. Assumes a 32% combined federal/state marginal income tax bracket, with short-term capital gains taxed at ordinary income tax rates. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of fees.


Even if you have no gains to counteract, you can still use your losses to offset up to $3,000 of ordinary income per tax year until all your losses have been accounted for.

If the proceeds from harvesting losses exceed your cash needs, you should reinvest the money in holdings that match your target asset allocation and show promising future prospects. Just be sure you don’t violate the so-called wash-sale rule by repurchasing the same or “substantially identical” securities within 30 days before or after a sale, lest your losses be disallowed.

4. Be tax smart

If, after harvesting all your losses, you still need to sell assets to meet your cash needs, be sure to make tax-efficient choices. For example, consider selling investments you’ve held for more than a year. Any gains on stocks, bonds, and mutual funds held for more than one year are taxed at a maximum federal long-term capital gains rate of 20%, whereas investments held for a year or less are taxed at your federal ordinary income tax rate.


Plan ahead

In an ideal world, these steps would be part of your regular portfolio maintenance. If the recent volatility exposed flaws in that routine, now’s a great time to do some proactive planning so you’re better prepared next time. In particular, you should remain vigilant about maintaining an asset allocation that’s appropriate, given your time frame and goals (see “Choosing the right allocation for you,” below).

“The right portfolio allocation isn’t just about your emotional tolerance for big price swings,” Mark says. “It’s about your time horizon: Can you afford to wait out a big loss?”

That’s one reason Schwab recommends individuals who are nearing or in retirement have enough cash on hand to cover at least a year’s worth of expenses—plus another two to four years’ worth of cash in a relatively liquid investment like a certificate of deposit or short-term bond fund.

“If you have enough short-term cash reserves stored up, you can avoid selling during a downturn altogether,” Mark says. “Nobody wants to buy high and sell low—and with a little planning, you may never have to.”

What You Can Do Next

  • Read more insights about weathering market volatility.

  • If you need a plan for your retirement income, consider Schwab Intelligent Income™, an automated investing tool available with Schwab Intelligent Portfolios® that can help you generate tax-smart withdrawals each month.

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Important Disclosures

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

Schwab Intelligent Income™ is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of Schwab Intelligent Income withdrawals nor does it guarantee any specific tax results such as meeting Required Minimum Distributions.

Tax-loss harvesting is available for clients with invested assets of $50,000 or more in their Schwab Intelligent Portfolios account. Clients must enroll to receive this service. Please be aware that the ability to realize significant tax benefits from tax-loss harvesting depends upon a variety of factors, and no assurance can be offered that a particular investor will in fact realize significant tax benefits.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples are hypothetical and provided for illustrative purposes only. They are not intended to represent a specific investment product or to be reflective of results you can expect to achieve. The examples do not reflect the effects of taxes or fees.

Diversification, asset allocation, and rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

Schwab Equity Ratings and the general buy/hold/sell guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment or other objectives or needs of, and may not be suitable for, any particular investor or client. Investors and clients should consider Schwab Equity Ratings as only a single factor in making their investment decision while taking into account the current market environment.

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