When stocks are volatile, conventional wisdom says to stay the course. But what if you have university fees due or a pending home purchase and you just really need to cash out?
Even the experts can get caught unprepared.
That is a lesson Jenny Van Leeuwen Harrington learned when she and her husband were planning to buy a house nearly 20 years ago. As a portfolio manager, Harrington was trying to sell stocks at the last possible moment to maximize gains. She was waiting in bed on the morning of Sept. 11, 2001, for the markets to open. And then, of course, time stopped.
“When the markets reopened a few days later, they were down a huge percent. I took a bath,” said Harrington, now CEO at Gilman Hill Asset Management.
Her takeaway: Do not mess around.
If you need to cash out of investments right now, while stocks are likely to be on a wild ride, here are some things to consider:
- Plan ahead, even a little bit
Ideally, if you have a big, scheduled payment coming up, you would plan ahead and move money from stocks to a high-yield money market account or other safer investments. “The longer runway you have, the safer you will be when you have to take the money out,” said Corbin Blackwell, a certified financial planner with Betterment, an online wealth management firm.
Eighteen months to a year is ideal, but sometimes that can stretch longer. Financial planner Erika Safran, who has her own firm in New York, has clients who have kept cash sitting around for two and a half years now, waiting to find their dream home.
Even a few weeks can do the trick. If you are facing a situation like university fees, you could sell a third of the shares you need 10 days prior, then another third a few days after that and the remainder a few days before the deadline, according to JJ Kinahan, chief market strategist at TD Ameritrade. This may differ based on the stock and company.
You can also make selling decisions based on the balance you need, Kinahan said. So if university fees are $30,000, sell shares for half the amount a few months before, and then set high and low limits for selling the rest.
- Choose carefully what to sell
Not all stocks in your investment portfolio are the same, so when you go to sell, do thorough research. Harrington spoke to a client this week who is raising cash. The client had three buckets to choose from with different tax implications.
For the most part, if you want to minimize capital gains, sell the stock with the least embedded growth.
When it comes to exchange-traded funds, your holdings might have a different cost basis if you bought shares over time.
“You need to call and say ‘I want to sell my highest-cost position so I can minimize taxes,’” said Harrington.
Consider selling bonds at the moment instead of stocks, said Bill Northey, senior investment director for U.S. Bank Wealth Management. For that matter, look at alternatives like a home equity loan or portfolio line of credit to avoid selling altogether, Northey added.
*It should be noted that the advise here was curated for an international portfolio holder and therefore some of the advise may not be applicable to the South African context.