Which Stock Should I Sell First? The best investors in the world didn’t build their fortunes through blind luck. They carefully considered their investment strategies and made thoughtful decisions on when and which stocks to trade.
Some had tremendous success through aggressive hedge fund management. For example, Steven Cohen, net worth $17.4 billion, made a fortune for himself and his partners through SAC Capital – an industry-leading hedge fund that pursued high-risk, high-return investments and delivered exceptional profits for nearly 20 years.
Other world-class investors developed billion-dollar portfolios by selecting undervalued companies and holding their stock long-term. For example, Warren Buffett, net worth $97 billion, once said his “favorite holding period is forever.” He is known for hanging on to high-performing assets like Coca-Cola and American Express for decades.
However, even Warren Buffett isn’t willing to make a lifetime commitment to every stock he buys. Sometimes, selling is the best choice from an investment perspective. For the non-billionaires, selling may be the only choice when budgets get tight and bills need to be paid.
Assuming there is no need to liquidate the entire portfolio, the big question is this: Which stock should I sell first?
Should I Sell Old Shares Or New Shares First?
When you sell a stock can significantly impact your net returns – and it has nothing to do with timing the market or buying low and selling high. The tax laws treat stock sales very differently depending on how long you have owned the shares.
Any profits earned from the sale of stock you have held less than a year are taxed as regular income. Profits from the sale of stock you have owned for more than a year are taxed as capital gains. The capital gains tax rate is lower than the income tax rate for most taxpayers, which means you keep more of your profits.
If minimizing taxes is a high priority, then you may wish to look beyond the tax rate. Consider which shares have increased the most.
In a declining market, you might avoid taxes altogether by selling recently purchased shares at a loss. Your tax advisor is the best resource for planning trades to minimize tax liability.
Should I Sell High-Risk Stock First?
Tech investors have had a tough year. Companies that grew rapidly in 2020 and 2021 saw share prices drop dramatically in 2022. Reliable performers like Netflix and Amazon are down more than 60 percent and 24 percent, respectively, year-to-date, and newcomers to the market have lost even more. For example, Upstart is down roughly 80 percent, and Peloton lost nearly 75 percent of its value in 2022.
The trouble with tech stocks is that they are generally riskier than companies in established industries like energy, consumer staples, and healthcare. New tech companies aren’t profitable at all, and established companies see profits decline when an economic downturn prompts consumers to reconsider non-essential purchases.
The increasing interest rates and rising inflation of 2022 made investors anxious about the future of tech stocks. Many elected to sell high-risk shares in favor of recession-proof alternatives.
However, simply dumping tech stocks en masse isn’t the answer in a volatile market. Certain companies are likely to thrive regardless of the economy. It comes down to basic factors that separate quality companies from their questionable counterparts in any industry.
When choosing which stock to sell first, consider the essential characteristics of the underlying business. Has it avoided excessive amounts of debt? Is it generating profits? Will it remain competitive as others attempt to pull market share away? The answer is yes to all of these questions for companies like Apple and Amazon. Instead of selling these stocks, the price dip makes it a good time to buy.
On the other end of the spectrum, tech companies like Peloton should be at the top of the sell list. Though Peloton enjoyed strong growth during the pandemic, a series of financial missteps, unsupported expansion, and fierce competition have put the company’s future at risk. No matter what industry a company is in, issues like these mean it is time to sell the stock.
Should I Sell The Most Profitable Stock First?
Unfortunately, as with most market-related questions, this one can’t be answered with a simple yes or no. It’s only possible to make the right decision by looking a little deeper. Consider these four scenarios:
You own a stock that is currently underperforming. However, all signs point to reliable growth over time because it’s an innovative company with a strong management team and a wide moat. This is a stock to hold onto – and buy more of – if possible.
You own a stock that is enjoying unexpected growth, though the underlying company is struggling. Meme stocks like AMC and GameStop come to mind. This is one to sell. Lock in your profits while you can because a fragile company won’t be overvalued for long.
You own an underperforming stock, and there is no reason to believe it will recover. Yes, you hope to regain your initial investment eventually, but realistically, the chances of the company turning around are slim. This is the stock to sell first. It’s time to cut your losses and sell these shares, no matter how much it hurts.
You own a stock that is growing in value and has the hallmarks of a company that will continue to grow for the foreseeable future. It is tempting to lock in your returns, but stick to your strategy and hold onto this stock. Its long-term value will do more to build your wealth than selling your shares and speculating on a less reliable opportunity.
The bottom line is that you can’t base your decision to sell a stock on current performance alone. Instead, consider how likely it is that the company will prosper within your investment horizon. Sell stocks that don’t have what it takes to deliver returns over time, and hold onto those that will continue to add value to your portfolio.
How To Choose Which Stock To Sell
Once you have considered key questions around tax liability, risk, and long-term outlook, you may have enough information to decide which stock to sell first. However, that’s not always the case. If you are still left with several options, compare a sale’s impact on your portfolio’s overall diversity.
For example, if you are left with a choice between two financial stocks and an energy stock, the best stock to sell is likely to be one of the financial companies. Your portfolio will retain exposure to two sectors rather than relying on financial services exclusively. That sort of diversification adds stability and reduces your overall risk.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.