Over the past few months, my portfolio has gotten crushed as a result of the sell-off
in tech and growth stocks in general.
I know all the haters who commented on my video about quitting dividend investing are
ready to jump in and say “I told you so”, but I’m not giving up yet.
In fact, selling some of my stocks at a loss in this market environment has been a great
tool that I expect to actually improve my future returns.
So in this video, I’m going to tell you why I’ve actually been happy to sell stocks
at a loss throughout the past few months.
Well I guess I would prefer to sell stocks at a gain, but this is how I’ve been able
to strengthen my expected returns while my stocks have been going down.
My reasons for selling stocks at a loss include things like doubling down on certain positions,
managing margin and securing some substantial tax benefits.
In addition to my 3 all reasons, I’ll share 3 other scenarios when you might want to sell
your stocks even if you’re in the red, so let’s get into it.
The first reason I’ve been selling stocks at a loss is to double down elsewhere.
This has been a combination of moving into stocks that are particularly beaten down as
well as moving heavier into my higher conviction stocks.
For example, imagine I own two different stocks, one is down 10% and one is down 20%.
However, I have a similar level of confidence in both investments.
In this case, the stock that is down 20% may be a better opportunity because it’s fallen
a greater amount from my average purchase price.
If I believe that both stocks will return to their previous prices, it makes sense to
adjust my allocation to be heavier into the stock that’s suffered the bigger loss.
So, I would be happy to sell the first stock at a 10% loss and move that money into the
stock that is down 20%.
And like I said, this goes hand-in-hand with allocating more of my portfolio to my higher
conviction stocks.
I had a few growth stocks in my portfolio that I hadn’t done a whole lot of research
on, so I didn’t feel confident holding them while growth was selling off.
At the same time, I was watching some of my favorite stocks get crushed by the market.
So I sold a handful of stocks that were down just a few percent and concentrated into some
of my favorite stocks where I had bigger losses.
I’m expecting that this strategy will produce a greater rebound in my portfolio when growth
stocks are back in favor in the market.
Although I personally did this within my growth-focused portfolio, this is also something that might
make sense across sectors or investment strategies.
For example, the last few months saw a lot of selling of tech and growth stocks as investors
moved into value-oriented investments that are typically safer for an inflationary period
like many people are expecting.
In this case, you would’ve done well selling these growth stocks at a loss and rotating
into things like financials and energy.
I personally wasn’t comfortable doing this, because I have been focused on these growth
investments over the last few months, and I didn’t want to risk missing out on any
sort of rebound they saw.
Plus, I’m not much of a trader and plan to hold these stocks for at least a few years
anyway.
But if you know when and where to move, that can be a great reason to sell a stock at a
loss.
The next reason I sold at a loss is to manage my margin.
I just started using margin a few months ago, which in hindsight was pretty bad timing,
but I’ve kept it fairly responsible at about 20% of my portfolio.
This means 20% of my portfolio is made up of borrowed money, or in other words, I’m
borrowing 25¢ for every dollar I invest.
I’m using margin in my Robinhood portfolio, which has different limits depending on how
risky they deem your stocks to be.
I held a few stocks and options contracts in my portfolio that had a 100% margin maintenance
requirement.
This meant I was at a much higher risk of a margin call if my portfolio started losing
value, because I needed a larger account balance to maintain eligibility for the margin I had
used.
So what I did was sell out of a few of these riskier or more volatile positions and moved
them into positions with lower margin requirements.
This also went along with my goal of doubling down in other positions, because I was able
to get out of positions I was less confident about while increasing my position in higher
conviction stocks.
By doing this, I was able to avoid a margin call and maintained the flexibility to add
more cash into the market when I wanted to, instead of when my margin balance required
it.
The third and biggest reason I was okay selling stocks at a loss was to secure the capital
losses for doing so, which can be a really powerful tax strategy.
I’ll break it down.
As you likely know, you have to pay capital gains taxes on any dividends or interest you
earn throughout the year, as well as on any profits from selling stock.
But, you can cancel out any of these capital gains with capital losses.
So if I had $1,000 of capital gains, I would owe about $150 in taxes at the long-term capital
gains tax rate, which is the best case scenario.
However, if I also had $1,000 of capital losses, from selling stocks at a loss for example,
it would cancel out that $1,000 of capital gains and I would owe $0 in taxes.
Furthermore, if you have more capital losses than capital gains, you can deduct up to $3,000
of additional capital losses from your income.
Even better, if you somehow manage to accrue even more than $3,000 in net capital losses
for a year, you can carry that capital loss into future tax years and continue using it
to offset your capital gains and income.
So even though the perfect scenario is just selling stocks at a profit and paying a little
bit in taxes, there are a lot of ways to reduce your tax obligation by realizing some capital
losses.
I’ve personally been sitting on some unrealized long-term gains from cryptocurrency, but I’ve
been putting off doing anything about it because I didn’t want to pay taxes yet.
After realizing some capital losses in the stock market with my first two strategies,
it gave me a great opportunity to secure some of my capital gains from cryptocurrency without
owing taxes on them.
I’ve been wanting to move some money from cryptocurrency into stocks anyway, so this
was a great time to sell high in the crypto market and use that cash to buy low in the
stock market.
So those are personal reasons I have been selling stocks at a loss, but I’ve also
got three more situations where selling stocks at a loss makes sense.
One of these reasons is simply to limit your losses.
If you have a low risk tolerance or plan on needing your investment portfolio for retirement,
income or anything else in the short-term, you might not be able to hold a losing stock.
In these cases, it may be responsible to identify a maximum loss that you’re willing to sustain.
This will protect you from falling into any sort of financial risk that you wouldn’t
be able to tolerate.
While you could just keep an eye on the stock every day, the easiest way to do this is with
a stop-loss order.
After you purchase the stock, you can set a stop-loss order that will automatically
sell your position if the price reaches a certain point, whether you want to minimize
your losses at 5%, 10% or whatever it may be.
This is something I would like to incorporate since the growth stocks I’ve been investing
in tend to be more volatile.
Had I been doing this lately, I would have been able to cut my losses in early stages
of the market sell-off, then buy back into the same stocks at lower points.
This is just not a decision I’m comfortable making in the moment, so creating stop-losses
ahead of time might be a better solution.
Another reason to sell a stock at a loss is if something has changed, either with the
stock itself or your own investing strategy.
It’s one thing to continue holding a stock that’s dropped due to overall market sentiment
or other external factors, but when something significant has changed with a specific business,
it’s a great time to reevaluate the stock.
For example, if they’re accumulating more debt, cutting a dividend or pivoting their
business to other areas, the stock may not represent the same goals that you envisioned
for the company when you first purchased shares.
I’ve personally gotten burned trying to hold stocks through bad news that never ended
up recovering, purely because selling at a 10 or 15% loss seemed unattractive.
But if these are serious issues that lead a stock to continue dropping towards 20 or
30% losses or more, it would be better to re-evaluate in those initial stages and cut
your losses if you no longer believe in the business or its value proposition.
Similarly, if a stock no longer aligns with your investment strategy, it might not make
sense to hold it.
For example, last year, I started a dividend portfolio with the intention of creating passive
income.
However, I later realized that a growth strategy better aligned with my investment goals, and
decided to sell all of my dividend stocks and funds to reallocate.
Luckily the market was booming back from the crash in March, so I didn’t actually sell
at a loss here, but that’s a personal example of when selling made sense for my strategy.
For better or for worse, I probably would’ve made the same decision even if my investments
were down.
For you, this might work the opposite.
Maybe you no longer have the risk tolerance for speculative growth investments, and want
to shift to a more stable dividend portfolio to retire or earn passive income.
In any case, it’s important to continue adjusting your portfolio to fit your goals,
and that might mean selling stocks at a loss.
The last reason to sell stocks at a loss is if you simply need cash.
In a perfect world, we’ll never be put in a scenario where we’re forced to sell our
investments at a loss, which can be avoided by things like keeping an emergency fund and
managing risk within your portfolio.
However, there are a multitude of reasons why you might want to get access to extra
cash, and I think in these situations, investors should be more comfortable with taking money
out of their investment accounts.
I have my retirement fund, which of course is exclusively for retirement and serves as
my safety net, but I also invest in a standard taxable account that I want to be completely
flexible with, in case I come across opportunities outside of stocks or I’m preparing for something
big like buying a home or planning a vacation.
After all, these are the kinds of things I’m putting money away and investing for in the
first place.
So I tend to think of my taxable investment account as a riskier, more exciting savings
account that I can take cash out of if it becomes appropriate to do so.
Obviously, I still view it as a long-term position that will hopefully grow over time,
but it may also decrease over some time periods, and that’s a risk I’m comfortable with.
Even if I’m forced to cash out some of my investments at a small loss, I believe that
it’s better that I invested that money in the first place rather than spending it on
something else that I never would’ve gotten cash back out of in the future.
And that wraps up the 6 reasons I have for selling stocks at a loss, and how I’ve been
thinking about selling stocks in general lately.
I feel like with the “diamond hands” mentality that’s permeated cryptocurrency and stock
investing, the only advice you ever hear is to buy, buy, buy and never sell.
I think it’s created an unhealthy stigma around selling any of your investments, which
could be a potentially dangerous mindset to get into.
So I wanted this video to be a reminder that there is a time to not just sell stocks, but
to sell them at a loss.
It’s been refreshing for me to reconsider the selling side of things, and I hope you
guys found some value in it as well.
With that, I’d be interested to hear from you in the comments if you have any reasons
for selling stocks at a loss that I didn’t mention.
Otherwise, I’ll see you back here next week for another video.