Think back to when you first started setting money aside in a long-term investment plan. Depending on when you began investing, you may have already seen your investments ride the ups and downs of shifting economic trends. Or maybe investing is a new experience and you’re not quite sure what to make of your investment’s performance amid economic and market shifts.
History tells us that investment markets move in cycles that are influenced by a variety of factors such as the economy, interest rates and inflation. If the current market cycle doesn’t seem to favor your choice of investments, it’s natural to consider making changes. Before you do, make sure those changes are consistent with your long-term investment goals.
If you’re thinking about selling any of your investments, answering the following six questions first should help you and your financial advisor keep your portfolio on the right track.
1. Am I selling because other investments have performed better and I feel like I’m missing out on greater opportunities? (I should also assess whether or not my goals have changed.)
If the answer is yes, you may be making a sound decision. Changing goals may require a change in your investment program. On the other hand, it’s not unusual for investments to go through periods of underperformance. Not all investments or individual stock or mutual funds can top the charts at the same time.
Action Step: Let your financial advisor help you decide if you are unsure. Evaluate other factors such as tax implications, transaction costs and alternative investments. In addition, your advisor will review the reasons you initially chose the investment. Evaluate its performance in the context of investment and economic conditions. If the investment still suits your long-term goals and there’s a valid reason why it was out of favor, you may want to keep it.
2. How will I feel if I sell this investment and suddenly it outperforms? Imagine patiently enduring a period of underperformance while your patience wears thin and you sell � just in time to see your investment roar back into favor.
Action Step: Talk to your financial advisor about why you selected this nvestment for your portfolio. Determine if it still meets your needs. Think twice before exposing yourself to seller’s remorse.
3. Have I considered possible tax implications?
Many investments have appreciated considerably over the last several years. Are you willing to sell your stocks or mutual funds and possibly pay capital gains taxes only to discover that you want to own them again?
Action Step: Work with a financial advisor to help you determine your cost basis and your tax advisor to evaluate the tax implications before you sell an investment.
4. Will selling this investment affect the overall risk profile of my portfolio?
You probably selected some investments specifically for their low risk characteristics. Conversely, you may have selected higher risk investments because they had higher growth potential.
Action Step: Determine how selling this investment will shift your portfolio’s reward potential in relation to its risk profile.
5. What will I buy to replace this investment?
It’s a good idea to know what you’re going to buy with your proceeds before you sell. Consider the possibility that your proposed purchase could be a hot investment nearing the end of its performance cycle. You should also think about whether your purchase duplicates investments you already own and how it will affect your overall risk profile.
Action Step: Decide whether the investment you plan to buy is really more appropriate than the one you already have.
6. Would I be better off adding an investment to my portfolio rather than exchanging one for another?
This solution lets you adjust your portfolio without incurring tax consequences and without selling an investment at what could be the wrong time.
Action Step: Consider adding a different type of investment to your portfolio to increase your diversification and your opportunities for appreciation.
Most people think successful financial planning depends on choosing the right investments. Keeping the right investments can be just as important. Be sure to maintain a long-term perspective and talk to your financial advisor before making any changes to your portfolio.
By Scott L. Deaton
Mosaic Consulting, LLC
In conjunction with Lincoln Financial Advisors, a registered investment advisor
Scott L. Deaton, CFP®, MBA is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp. (370 Southpointe Blvd. Suite 200, Canonsburg, PA 15317, 724-743-6159) offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.