Ask the Adviser: Is it ever okay to sell investments during a bear market? - Rodgers & Associates

Ask the Adviser: Is it ever okay to sell investments during a bear market?

Q: Is it ever okay to sell invest­ments during a bear market?

A: Maybe, but it depends on your overall investment strategy. There can be legit­imate reasons to sell invest­ments during a market decline—but fear of the future isn’t one of them.

Neither is “timing the market.” Investors often feel temped to liquidate and hold cash on the sidelines until things turn around. Unfor­tu­nately, this rarely ends up working in the investor’s favor. Histor­i­cally, the market has rewarded those who are patient and stick with a long-term strategy.

However, this doesn’t mean that you should never sell during a market decline. Here are three scenarios when doing so may be a shrewd move:

Reason 1: Tax Loss Harvesting

Sometimes it makes sense to sell an investment that has lost value in order to generate capital losses—and reap the tax benefits that result.

Capital losses can be used to offset capital gains. If there are no capital gains to be offset, capital losses can be used to offset up to $3,000 of income from other sources. Any losses that are not used to offset gains or up to $3,000 of other income will carry forward into future tax years until used.

Keep in mind: tax loss harvesting should only be used if it fits into your overall investment strategy. The desire to realize the tax benefits of capital losses should not override the objec­tivity or efficiency of your approach.

Reason 2: Rebalancing

Your investment strategy may lead you to sell invest­ments during a decline to help rebalance your portfolio. This has been true in 2022, when invest­ments like short-term bonds and large cap value stock indices did not decline nearly as much as invest­ments like small cap growth or emerging markets stock indices in the first half of the year.

When following an investment strategy with asset allocation targets, it may be prudent to rebalance your portfolio by selling one investment and buying another that has experi­enced a greater decline.

Reason 3: Refining Your Investment Strategy

Your investment strategy should always align with your long-term goals—and periods of economic decline often help investors recognize where their goals and strategy don’t match.

This is a critical issue that should be addressed immedi­ately, whether on your own or with the help of an adviser. I often quote the proverb: “The best time to plant a tree was 20 years ago. The second-best time is now.” It’s true during bear markets, bull markets, and all the fluctu­a­tions in between.