There's a lot of general financial advice circulating during the COVID-19 crisis. Boost your emergency fund. Don't take on new expenses. And leave your investments alone.
The latter is good advice in theory. Most portfolios have taken a substantial hit in the wake of COVID-19, and if you unload investments when they're down, you lock in losses. If you leave your investments alone, however, you may not end up losing a dime after all is said and done.
But while dumping your stocks isn't something you should do on a large scale, it could pay to unload a specific investment that just hasn't been doing well these past few months. If you're thinking of going that route, ask yourself these three questions.
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1. Is it an outlier?
Most stocks have lost value compared to where they were back in February. But if you have a specific stock in your portfolio that's taken a far more substantial hit or a stock whose sector could see further losses as the year goes on, then it could pay to sell off that single investment and limit the bleeding.
For example, if you have cruise-line stocks in your portfolio, it's fair to assume that things could be rocky well into 2021. Even if the economy largely opens back up, cruise lines will need to work hard to shake the stigma of being COVID-19 breeding grounds. While people may eventually start traveling again later this year, it could be a while before cruise lines regain popularity. And that could be a reason to dump a cruise-line stock while leaving the rest of your portfolio as is.
2. Does it align with my investing strategy?
Maybe your investment strategy is to load up on value stocks whose business models you clearly understand. If there's a stock in your portfolio that doesn't fit that bill, it could pay to unload it and replace it with a company whose finances you have a better grasp on.
3. Can I use it for tax-loss harvesting?
Any time you have a losing investment in your portfolio, you get an opportunity to capitalize on a strategy known as tax-loss harvesting. When you sell off an investment at a loss, that loss can be used to offset capital gains. And that's important, because since the market is down, there are plenty of opportunities to snatch up quality stocks on the cheap. If you then sell those stocks at a higher price than what you pay for them, you'll be taxed on those gains -- unless you have a loss on hand to cancel them out.
Furthermore, if the investment loss you take surpasses your gains for a given year, you can use your remaining loss to offset up to $3,000 worth of ordinary income. And if you're still left with a loss after that, you can carry it into the following tax year.
It's never easy to see your investments lose value. While some downturns are short-lived, it's hard to predict what the rest of 2020 has in store for the stock market, as much will depend on what progress is made in the fight against COVID-19.
While leaving your portfolio alone is generally a good idea, in some cases, selling a single bum investment could make sense. And while that may translate into a loss, the upside is that you'll then be able to use that loss to your advantage.
