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| Adrian Mastracci, president of KCM Wealth Management, says “Everybody can buy. The selling part of the decision is the gut wrenching one. Full of fears and concerns." |
For Immediate Release
Vancouver, BC (September 6, 2005): Please excuse the language. “Sell” can be a four-letter word in some investing circles. However, there is no reason to suffer through this anguish and anxiety.
Mark Twain so eloquently said, “It is from experiences such as mine that we get our education of life. We string them into jewels or into tinware, as we may choose.”
Adrian Mastracci, investment counsel at Vancouver's “fee-only” KCM Wealth Management, comments, “Everybody can buy. The selling part of the decision is the gut wrenching one. Full of fears and concerns.”
What if it goes up after I sell? Will I have to kick myself? Will I miss out on the rising tide? What if there is a turnaround? Am I making the right move?
So many questions, so few answers. A topic of discussion that investment advisors can have with their clients. Perhaps to develop a strategy that addresses the concerns.
When it comes to selling, whether “high” or “low”, emotional attachments can stop investors in their tracks like no other. Logic goes into short supply. It’s like a deer in headlights.
Walk with me for a while down this road. We’ll attempt to tame the dreaded fears of selling.
The investment scenario
Here is the common investment scenario that presents an opportunity worthy of consideration. Perhaps, it will lead to a winning outcome for plenty of investors.
Let’s say an investor has a portfolio where one or more components have risen in value. The energy sector comes to mind, either as individual stocks or a variety of mutual funds. This typically means that the asset mix has moved from the targets.
At the same time, that investor has some investments which have been fading for years. Maybe stocks whose investment hopes were dashed since the higher prices paid for them.
Often referred to as the dogs, or losers, of the portfolio. Only a miracle turnaround resurrects many of them from the depths of investor despair.
This scenario can exist in both personally owned portfolios and in registered accounts, like RRSPs, RRIFs, DPSPs, RESPs and IPPs. Each type of account is treated separately.
The worthy opportunity
The opportunity is to consider selling some of the current winners. No, I have not lost my marbles. I don’t have a fever, or hypothermia. A much worse fate than selling high can happen to an investor.
We’re just selling sufficient amounts to tweak the portfolio back to the target asset mix. There is no requirement to sell an entire winning position. Deferred sales charges may apply for some.
Hopefully, “sell” is shedding its’ four-letter word label by now. So let’s tackle the hardest part. Some, or perhaps all, of the portfolio losers are sold to offset gains realized in the personal accounts.
That way, little or no income tax is paid. The tax implications won’t pertain to the registered accounts. However, the same selling considerations apply.
Investors fortunate not to have any losers in their portfolios can still consider selling some of the winners. Of course, income tax may apply on personally realized capital gains.
The benefits of selling
The primary reason to consider selling is to restore the current asset mix to one’s target levels. That is after price movements materially change the value of a particular asset class or sector.
Say an investor is comfortable with an asset mix of 50% in equities and 50% in fixed income. Subsequent price movements then shift the mix to 60% equities and 40% fixed income.
This individual would consider selling some of the winners and allocating the proceeds into fixed income components. The goal is to bring the asset mix close to the desired 50-50 comfort zone.
Investors who periodically examine their portfolio winners and losers achieve these benefits:
- Rebalancing tweaks the portfolio closer to the target asset mix.
- Less chance of developing emotional attachments to the chosen investments.
- Investment analysis on the total portfolio basis, not individual securities.
- Learn to sell high and low without nagging doubts.
Yes, the price may rise further after a sale. However, second guessing in hindsight is not allowed. No looking back, it’s foresight that counts.
There is no need to dwell on the should, would, could or ought to have done outcomes. Savvy investors make their moves and move forward. No regrets.
Investing is about being right more often than wrong. All of us will be wrong some of the time. Even the professionals.
Investment experiences can change. They too can be strung into jewels or tinware. Preferably the first, not the second.
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