We’ve talked a lot about being careful when selling gains, both because of capital gains taxes and the pitfalls of trying to time the market. Our philosophy is simple: stay invested unless you have a legitimate reason to sell and you’ve thought it through carefully.
But what exactly counts as a “legitimate reason”?
Let’s be honest: the temptation to sell is everywhere. The market drops 5% and suddenly everyone’s talking about a correction. A friend brags about timing the top perfectly. You read a headline predicting doom.
Yet study after study shows that the average investor underperforms the market specifically because they sell at the wrong times, usually during downturns or in misguided attempts to time the market.
So when should you sell?
The 8 Legitimate Reasons to Sell Stocks
1. Rebalancing
Over time, your portfolio naturally drifts from your target allocation. If stocks surge, they might grow from 80% to 90% of your portfolio. That extra 10% represents increased risk you didn’t intend to take.
Rebalancing means selling some of those gains and buying underweighted assets to get back to your target mix. You’re essentially selling high and buying low, exactly what everyone says to do, but in a systematic, unemotional way.
Example: Your target is 80% stocks, 20% bonds. After a bull run, you’re at 88% stocks, 12% bonds. You sell enough stock gains to get back to 80/20.
2. Age-based adjustments
As you approach retirement, you typically want to reduce risk. This often means shifting from stocks to bonds to protect your portfolio from major downturns when you’ll need to start withdrawing funds.
Why? Because sequence-of-returns risk matters enormously in retirement. If you retire into a bear market and need to sell stocks for living expenses, you’re locking in losses and permanently reducing your portfolio’s ability to recover.
Example: You’re 55 with a 90/10 stock/bond split. Over the next 10 years, you gradually shift to 60/40 by your retirement at 65.
3. Fundamental strategy changes
Maybe you want to reduce exposure to a specific sector like tech or energy and increase your position in healthcare or international markets. Perhaps you’re shifting from individual stocks to index funds, or vice versa.
These are deliberate shifts based on your long-term goals, not reactions to short-term market moves.
Key distinction: “I want to reduce tech exposure because it’s 40% of my portfolio” is strategic. “I want to sell tech because I think it’s going to crash” is market timing.
4. Tax-loss harvesting
This is one of my favorite strategies: selling investments at a loss to offset capital gains and reduce your tax bill. Done right, this is strategic selling that actually improves your after-tax returns.
The beauty of tax-loss harvesting is that you can immediately reinvest in a similar (but not identical) asset, maintaining your market exposure while capturing the tax benefit.
Example: You have $10K in gains from Stock A and $8K in losses from Stock B. Sell Stock B to harvest the loss, offset most of your gains from Stock A, and reinvest in a similar ETF to maintain exposure.
5. Life events requiring cash
Sometimes you actually need the money. Buying a home, funding education, covering medical expenses, or starting a business are all legitimate reasons to sell.
The key is planning ahead when possible, ideally giving yourself time to harvest losses first or choosing which positions to sell tax-efficiently.
Smart approach: If you know you’ll need $50K in 18 months for a down payment, you can strategically harvest losses over that period and choose which lots to sell based on their tax implications.
6. Reducing concentrated positions
If a single stock grows to represent 20%, 30%, or more of your portfolio—often from company stock or a big winner—you’re taking on unnecessary risk. Diversifying makes sense even if it means paying some taxes.
I see this frequently with people who’ve worked at successful tech companies. Their company stock has made them wealthy on paper, but they’re also incredibly exposed to a single company’s fate.
Remember: It’s better to pay taxes on gains than to watch a concentrated position crash. Just ask former Enron employees.
7. Investment thesis no longer holds
If the fundamental reasons you bought an investment have changed, maybe the company’s business model is failing, management has changed direction, or competitive advantages have eroded, it may be time to sell.
This is different from reacting to temporary price drops. The stock price going down isn’t a reason to sell. The underlying business fundamentally changing is.
Example: You bought a retailer because of their e-commerce transformation. Three years later, the transformation has stalled, management has changed strategy, and competitors are gaining market share. Time to reassess.
8. Generating retirement income
Once you’re retired, you’ll need to systematically sell investments to fund your living expenses. This is the whole point of building wealth, to eventually use it.
The key is doing it tax-efficiently, typically starting with required minimum distributions from retirement accounts, then carefully selecting which taxable account positions to sell based on their tax lots.
Strategy: In retirement, you might follow a hierarchy: RMDs first, then taxable account sales (prioritizing long-term gains over short-term), then strategic Roth conversions, then tax-deferred account withdrawals.
The Key Difference
Notice what all these reasons have in common? They’re proactive, strategic decisions, not reactive attempts to dodge a market downturn.
None of them involve:
Selling because you’re scared
Selling because you think you can time the market
Selling because CNBC is predicting doom
Selling because your portfolio is down 10%
The worst investment decisions are made in moments of panic or overconfidence. The best decisions are made calmly, strategically, with clear reasoning.
A Framework for Making the Decision
Before selling, ask yourself:
What’s my specific reason? Can you articulate it clearly beyond “the market feels high”?
Is this strategic or reactive? Are you responding to a long-term need or short-term emotions?
Have I considered the tax implications? What’s the after-tax outcome?
What’s my plan after selling? Where will the money go? When will you reinvest?
Am I following my predetermined strategy? Or am I making this up on the fly?
If you can’t answer these questions confidently, that’s usually a sign to pause and think more carefully.
The Bottom Line
Selling isn’t inherently bad. Strategic, thoughtful selling is an important part of portfolio management. The problem is that most people sell for the wrong reasons at the wrong times.
Stay invested. Stay patient. Stay strategic.
When you do sell, make sure it’s for one of these legitimate reasons—and that you’ve thought through the decision carefully.
What’s been your experience with selling investments? Have you faced any of these decisions? Reply and let me know—I read every response.
P.S. If you’re interested in automated tax-loss harvesting and tax-optimized portfolio management, that’s exactly what we’re building at Advizmo.
