A bear market is not an ideal time to sell, but if you don’t have enough cash on hand to cover your expenses or a medical bill, then you may need to sell something.
How do you decide what to sell? Try to take action in a way that’s consistent with your overall investment plan.
This three-step process can guide you through it.
Step 1: Review your overall allocation
Start with the foundation of your plan: your allocation to stocks and bonds. If your allocation has drifted away from its target, then consider selling the overweight asset to help you get back on track.
After the recent stock market rout, you may have more in bond funds than in stock funds, so to bring your allocation back in line and raise some cash, you’d sell some of your bond funds.
Step 2: Look at your individual holdings
Then look at your portfolio and see if there are changes that need to be made. Perhaps you’re holding funds that really should be sold, you could sell them and use proceeds to pay your bills.
Or maybe you’re looking to take a little less risk (and you can afford to do so and still reach your goals), you could choose to sell some of your riskier stock funds. This way, you’d have extra cash for your expenses, and you’d also have reduced your exposure to more speculative funds.
3: Consider taxes
In your taxable accounts, see if you own a fund at a loss. By selling the fund, you’ll harvest the losses, which can offset taxable gains. Realized losses can be carried forward into future (and more profitable) tax years.
If every fund you own still has gains, sell the funds that you’ve held at least a year, so you’ll realize long-term capital gains, which are taxed at lower rates.
Pro tip: Keep some cash on the sidelines to cover your expenses
Ideally, your financial plan includes an appropriate allocation to stocks and bonds to help you meet your long-term goals and enough cash on the sidelines to pay your expenses.
Some retirees keep a year’s worth of living expenses in cash. Depending on your situation and comfort, we recommend keeping six months to two years’ worth of core living expenses in cash. This way, you can cover immediate costs, and you probably won’t be forced to sell stocks at low levels (although you will need a plan to replenish your cash reserve periodically).
If feasible, you can reduce your spending following a market loss, so you’re withdrawing less when your accounts are at lower levels.