Selling stocks at a loss may seem like an awful idea. However, there are several reasons why I sell stocks at a loss that I think can actually BOOST your investment returns.
00:00 – Intro
0:49 – 1. To Double Down Elsewhere
2:35 – 2. To Manage Margin
3:34 – 3. To Secure Tax Benefits
5:08 – 4. To Limit Your Losses
6:01 – 5. Something Has Changed
7:30 – 6. You Need Cash
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This is how I’ve been able to strengthen my expected returns while my stocks have been going down:
1. Doubling 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. 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.
2. Managing 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. I sold out of a few of my 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.
3. Securing Capital Losses
You can cancel out capital gains with capital losses. 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.
4. 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. 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 minimize your losses at 5%, 10% or whatever it may be.
5. Something Has Changed
When something significant has changed with a specific business, it’s a great time to reevaluate the stock. If these are serious issues that lead a stock to continue dropping towards significant losses, it would be better to re-evaluate in the 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. 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.
6. You Need Cash
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.
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DISCLAIMER: NOT FINANCIAL ADVICE.
The content in this video should not be used as the basis for any investment decision, as it is for entertainment purposes only. Additionally, some of the links contained in this description are affiliate links. I may earn a commission via Amazon, WeBull, M1 Finance or Robinhood should you choose to purchase or sign up at the links provided.