Market conditions, your tax situation and your risk tolerance can all factor into the decision.
With stock market indexes at or near all-time highs, it’s clear why a “buy-and-hold” strategy is so often recommended for individual investors. But investors would be remiss to simply set their portfolios, then forget about them. Benchmarked against the broad-market Standard & Poor’s 500 stock index, some individual holdings will struggle—even in a rising market—and may be good candidates for a sale.
Knowing when to let go is a complicated calculus, however, says William Chenoweth, portfolio manager for Regions Asset Management.
“We’re very much buy-and-hold investors here at Regions, but that doesn’t mean assets are never sold,” Chenoweth says. “Buy-and-hold is in reference to our philosophy of maintaining an investment strategy aligned with long-term goals and values. We are constantly evaluating our clients’ investments, and repositioning them based on new information, ideas and the always-changing world.”
The stakes can be considerable. For example, in 2023, a handful of technology shares in the S&P 500 stock index rose more than 100% as a group, but another 493 acted in concert to limit the index’s overall gain to about a quarter of that. In short, the shares of most of the stock market’s 500 biggest companies “underperformed” in 2023. Certain mutual funds and exchange-traded funds also underperformed, depending on their investment strategies.
Underperformance isn’t the only consideration
To be sure, underperformance against an index isn’t in and of itself a reason to sell a stock. “Instead, when you’re considering making a transaction, weigh it in the context of your comfort with and capacity for risk,” Chenoweth says. “And ask yourself what has changed as to why you bought the investment in the first place.”
Sometimes, the underperformance might reflect a new outlook toward the company or its industry. Other times, a stock may have posted outsized gains, but its potential to outperform going forward has been played out, and it’s time to rotate into a more promising investment.
On an individual basis, taxes can play a big part in portfolio management. So-called tax-loss harvesting occurs when investors sell underperformers and use the resulting capital losses to offset capital gains achieved on other sales during the year, ultimately reducing their overall income tax bill for the year. “If we had our way, none of the stocks or investments our clients own would have losses at all, but we understand that’s not realistic,” Chenoweth says. “Tax-loss harvesting allows anyone to make the best of a bad situation.”
Holding on to an underperforming stock can be beneficial
Sometimes, it’s best not to sell at all.
Energy stocks, for example, scuffled from 2014 to 2020, especially toward the end of that period as the coronavirus pandemic crimped the global economy. But in 2022, while the broad market fell 18%, the energy sector rose dramatically, benefiting from people starting to travel and spend again.
In the end, Chenoweth says, selling an equity investment is a very individual decision. Investors have their own risk profiles and preferences, their own tax considerations and their own life changes—with jobs and children and mortgages. All of these can be factors in deciding when to move on from an investment.
“At Regions, we are extremely intentional in our investing philosophy,” Chenoweth says. “We have great conversations on the front end with our clients about what we believe and why we believe it. This then informs our conversations when they are thinking about selling an underperforming holding. If they know why they are making a decision, they can more properly evaluate that decision.”
Talk to your Regions Wealth Advisor about:
- What adjustments you might make to your portfolio.
- Whether your investment strategy is in line with your current risk tolerance.
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