It's the last week of the month, which fans of Rule Breaker Investing know means they're due for a mailbag episode filled with both useful advice and humor.
In this segment, Motley Fool co-founder David Gardner has invited analyst Emily Flippen and Rule Your Retirement and Total Income advisor Robert Brokamp to assist him in answering William, a Fool subscriber who does buy and hold for the long term. But sometimes, a person needs to turn assets into cash. When those times come, how do you pick which stocks among your holdings to sell? The trio talk about their various strategies.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 29, 2019.
David Gardner: Rule Breaker mailbag item No. 4. This one's from William Wood. "May I first thank you and all your fellow HQ Fools who do such a great job not only in giving great advice, but also giving it in such a way that makes it fun, interesting, and easy to comprehend for those of us that are less sophisticated." Well, thank you, William! Since you've heard from Emily, since you've heard from Robert, you see the kinds of fun personalities that bounce around Fool HQ and make my job -- just speaking for myself -- a lot of fun.
"Having been a member of both Stock Advisor and Rule Breakers over the past few years, I've been able to take your advice and made some great gains. For that, my family and I say, thanks $1 million! :)" Well, thank you, William! "Although I adhere to the Fool commandment that says hold for years, and always remind myself that I'm an investor in businesses, not a stock trader, I pretty much keep myself fully invested in the market, although not very often, there are times when I do need to sell something to raise some needed cash.
"My question is, how do you pick a stock to sell when that time comes? Do you look at winners first? What about losers? Perhaps tax circumstances? How do you make that difficult choice to select from your portfolio when it comes time to sell? Thanks, David! Love the show, William Wood."
Robert Brokamp: Just start looking at individual companies. I am someone who believes in diversification and limiting, to a certain degree, how much you have in a single company or sector or industry. I'm more conservative that way. I know other Fools feel differently. I do tend to look at winners, just to make sure nothing has gotten too big of a part of my portfolio. I also look at asset classes. For example, over the last several years, U.S. large caps have done much better than international stocks, so I would be looking at maybe taking a little bit of the U.S. large caps off the table, keeping some of those other ones that have not done so well.
I also do look at tax consequences. No. 1 there would be, obviously, if you're not age 59 and a half or older, you shouldn't be tapping your retirement accounts. People talk a lot about tax loss harvesting at the end of the year, but I think it's something you should probably do during the course of the year. Look for something where maybe, if it is down below where you bought it, you could sell that, take that loss, just make sure you don't buy it again within 30 days. And a lot of people don't think in terms of the multiple purchases they've made of the same stock. They might have made multiple purchases deliberately or been reinvesting the dividends. You can identify which shares to sell for maximum tax benefit. So, those are a few thoughts on that.
Gardner: Emily, when we think about, if you're looking across a list of stocks -- we have this on our Rule Breaker scorecard. We have some stocks that are dramatically, in a sense, overallocated. If Intuitive Surgical goes up 30 times in value, it's going to count for a lot more in our Rule Breakers service than our latest pick last week, which is a very well-known ridesharing company that I can't fully share because it's brand-new information, but it's a really interesting company. So we're thinking about that, too.
Now, Emily, you're earlier on in the arc of your investing life. That's a way to say that you're younger than Robert and me. I'm just curious, personally with your portfolio, are you where you want to be in terms of the number of stocks that you have? Where are you with it? Are you making selling decisions? Share a little bit of what's behind the curtain for you.
Emily Flippen: Sure, I definitely don't own as many companies as I expect I will by the time I reach either of your ages.
Gardner: Starts with a five.
Brokamp: Me too, just a month away.
Brokamp: Thank you!
Flippen: For what it's worth, I expect that I'll be there. Where I am right now, I feel comfortable with the number of companies that I own. That being said, I have never had to raise a large amount of capital by selling, at least not to the extent that I'd be worried about which ones I would sell. I tend to, and I expect this is because of my age, disagree a little bit with Bro's methodology. I tend to think that outperformance is attributable to a small number of companies that tend to grow a ton. If you find yourself constantly selling down these companies, you could be depriving yourself of a lot of gains. So the first thing I go to is probably the tax consequences. I imagine everybody knows their own implications better than I do, but obviously, companies that I haven't held for a full year I would never sell because of the capital gains tax being higher in regard to those. And, companies that, maybe I otherwise feel equally about, but one I have a higher cost basis on, maybe that produces a little less taxable income. So for me, the tax is probably the biggest implication. But I tend to not want to sell my winners. If a company is winning, I tend to expect it will continue to do so.
Gardner: I'll put it down the middle, those are two good perspectives. In some ways they come from us at different stages of our life, even though both of what Robert and Emily said are just good philosophical stances that contrast somewhat with each other. But when we first wrote The Motley Fool Investment Guide, my brother Tom and I, I believe I wrote the chapter on selling. And the way I put it back then was, we try not to sell, but when we do or when we need to sell, we'll often ask ourselves, what do we believe in least going forward in this portfolio? It isn't necessarily about a winner per se, or a loser per se. It's more just going forward from the point at which you're going to need to sell, ask yourself, which seems to have the least potential? Sometimes that's a huge winning position that's maybe running out of gas, or it's already such a big thing that you should let go some of it. Other times, it might be a loser, something you're sitting there going, "That didn't fulfill the thesis that I had, so I'm just going to sell that." So I'm not sure in the end if it's about losers or winners.
I do think about taxes. Maybe a little bit more like Emily, I tend to just sell off my losers and hold my winners and love my winners, Robert. But every day, Robert, you're seeing people write in who have overweighted positions. And often the best advice they can do is to pare down those positions.
Brokamp We've seen that in our Supernova service, with Phoenix, when which regularly sells stocks to simulate a retiree portfolio. And it was regularly selling Netflix because Netflix was doing so well, it was overwhelming all the other holdings.
Gardner: That's right! So there is a consideration of just, is anything highly imbalanced, which was true for that portfolio. It tends to be true of my portfolio in life. So when I'm looking to give money away, I'm often going to give away appreciated shares, not cash, that's the most efficient way to give. And I'm usually going to be giving away my biggest winners. So, William, I hope that's helpful for you!
Brokamp: Can I make two more quick points that don't necessarily apply to William? That's, one, if you're retired, studies indicate that you should drain your taxable accounts first before tapping your tax deferred. And, for people who have a mix of stocks and actively managed mutual funds, I think you should always evaluate your mutual funds every year. We know that many of them tend not to keep up with their benchmarks. That's a great place to get some cash if that's not keeping up.
Gardner: Awesome advice! Thank you, Robert! Thank you for rounding that out! For a lot of listeners, it's not about this stock vs. that stock; it's about allocations in multiple different kinds of investments. There are a lot of considerations there.