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We’re all about long term investing around here.

We love the idea of buying shares and holding them forever. But does that literally mean never selling a single share during our lifetime?

Probably not.

There are plenty of cases where selling can make perfect sense. In this article, we’ll go through a few scenarios where that’s the case. I’ll flesh out the decision-making process when selling shares, how to go about it, and some important things to remember.

When selling shares can make sense

As unnatural as it may seem to someone who just dedicated themselves to long term investing, there are lots of occasions when you might hit the Sell button instead of Buy.

Here’s a few scenarios I can think of:

Use the money for a house deposit. You may have been investing for several years to build up a nice chunky deposit to buy your own property.

A holiday, car purchase or other large expense. This one isn’t something I’m a fan of, but some people invest with the goal of a future consumer purchase.

Change your portfolio. For most of us, there comes a time when we sell shares to re-allocate that money elsewhere in our portfolio.

Pay off debt. There’s nothing wrong with offloading some shares to pay off an old debt. If your portfolio is big enough, you might even want to get rid of a mortgage.

Retirement income. Maybe you sell the odd parcel of shares in retirement to give you some extra spending money.

Job loss. While not ideal, it’s good to know you can sell shares to create cash quickly if you need to.

Okay, so there’s a surprising number of reasons when selling shares can make sense. But how do we actually go about it?

Selling shares in practice

Before we get into the practicalities of selling shares, remember this: we shouldn't be investing with a short term timeframe.

If I need the money in 2-3 years time, I’m not investing that money. This is especially true if it’s for something important and I don’t want the market to affect the outcome.

Why? Well, even though the share market tends to go up more often than not, it doesn’t always. There’s a chance that when I want the money my shares may have fallen by 20% or more.

Here’s another example: if I’ve been investing my savings to build up a big house deposit, and I expect to reach this goal in 2-3 years’ time, then I’d strongly consider cashing out. Why? Because it’s the same decision as investing new money today.

Either it’s sensible to have money in the market for the next few years, or it’s not. But only you can decide whether you want to take that risk. And let’s be clear - it is a risk. If your goal can allow you to wait until the market recovers, then maybe staying invested is the right move.

Otherwise, it might be more prudent to cash out (or not invest in the first place) if the timeframe is only a few years and you don’t want your goals and plans to diverge off-course.

Deciding when to sell

It’s best to sell when the market is up, right? Well, ideally, sure. If the market has been going up year after year, then it’s probably not a terrible time to sell.

Of course, that doesn’t mean the market won’t keep going up after you sell. It certainly might. And while that may be a frustrating outcome, you simply couldn’t have known in advance.

But what if the market has been falling? Well, if you can wait a year, probability suggests the market is more likely to be up than down (since 1900, shares have provided positive returns in 75-80% of all years).

So, the sensible thing to do is sell when you need the money, either now or in a few years. Try not to make selling decisions based on what you ‘think’ the market will do in the near future. That’s a recipe for regret.

Instead, make these choices in a more independent manner. For example, “I need the money relatively soon and the market has been doing okay. Let me sell now and accept whatever the market does after that”. While this doesn’t sound very sophisticated, it’s one of the only sane ways to approach it!

Deciding what to sell

If you’re planning to sell and take some money out of your portfolio, which shares do you sell? There’s a few options.

• Sell those shares which have the lowest capital gains, as this would mean a lower tax bill. If you’re in retirement, you may not pay tax anyway. This means you might even choose to sell the shares with the highest gains now. This could lower your future tax bill if you expect to sell more shares later down the track.
• Sell any shares you don’t want to keep owning. Maybe you have a couple of holdings you no longer add to or like all that much anymore. This could include funds which are very similar, or overlap something else. Selling these simplifies your portfolio at the same time as giving you the cash you want.
• Sell some shares from each holding in your portfolio, keeping everything in a nice proportion the way it currently is. This suits people who are happy with their current portfolio and just want to create cash.

There isn’t really a right or wrong answer. It genuinely depends on the situation.

Deciding how to sell

Now, you might think that once you’ve chosen the above, it’s simply a matter of hitting the Sell button. For small amounts, you won’t bat an eyelid at doing this. But what about when the numbers are a little bigger?

What if, say, you’re offloading a sizeable chunk of shares which amount to a large sum of money? It could be, for instance, for that house deposit we were talking about earlier. In that case, the decision might be a little more stressful and require more consideration.

Here’s a few ways to do it…

• You could offload all at once, in a single transaction. This gets it over with (like ripping a band-aid off!) and minimises brokerage costs. On the flipside, it could prove to be stressful.
• You could sell shares in small amounts (say, a bit each week/fortnight/month for a few months or a year). This costs more in brokerage and your cash comes slower. However, you may get extra gains given the extra time invested.
• You could do half of each: sell one lump straight away and slowly sell the rest to reach your target. This will give you a blend of the benefits and drawbacks of the first two options.

Now, it obviously depends on the size of cash we’re talking about, and how large that feels to you. Because that will largely determine whether or not the selling process is stressful.

Again, you can’t know which approach will give you the best outcome. So which option do you feel most comfortable with?

You’ll notice how this decision-making process is a lot like investing in a lump sum. It’s basically just the reverse of that.

Avoid being a forced seller

So far, we’ve discussed common reasons for selling, and how you might go about doing so. Beyond that, it’s worth remembering that you don’t want to become a forced seller.

This is where you have no option but to sell. Maybe you weren’t prepared for an unexpected event, or your situation changes and you need money quickly.

There’s nothing wrong with selling shares. However, you want to be in a position where selling is optional, where you can delay, or find some workaround.

This gives you more control over the market environment in which you sell, which will generally improve the outcome. Not only that, but you’ll be calmer and more comfortable about the whole thing.

So how do we reduce our chances of becoming a forced seller?

• Have a solid set of finances and a good savings rate.
• Keep an emergency fund or cash buffer of some kind.
• Don't invest for short term goals in the first place.

Final thoughts

I hope this article has helped answer some questions you maybe hadn’t even thought of yet. You now know when to sell, what to sell, and the different ways to go about it.

And even though it may be a while before you sell any shares, you now have a guide to help you through the process.

As you can see, there’s no perfect way to do it. There are also a few things to consider before deciding on an approach for your situation. Unfortunately, there’s just no way to know the ‘optimal’ choice until we look back later. A simple truth of investing is that while the rear view mirror may be clear, the windscreen is always foggy.

And yep, I’m paraphrasing Warren Buffett to finish off this article. Because that’s what long term investors do 😉

Until next time, happy investing!