When to Sell Your Shares

Financial Autonomy - Blog
When to Sell Your Shares

When it comes to stock market investment, buying is easy, selling is hard. It’s interesting how there’s always so much talk about exciting new opportunities and yet rarely is the exit plan discussed. Well, let’s address this common investment strategy oversight and help you decide when it’s time to sell your shares.


Selling Strategy

Most things in life are best started at the beginning, and share investment is no different. When you establish your investment portfolio, have a plan around when you will sell. This will largely come down to your portfolio objective. Are you investing to save for retirement, build up a deposit for your first home, to pay for the kids education, or perhaps to establish a passive income stream in the future so that you can make a career change or cut back paid employment?

If you’ve had a chance to read my book, or worked with me and the team at Guidance, you will know that we spend quite a bit of time discussing objectives, really trying to quantify these accurately and nail them down. One reason it’s so important to get these accurate is so that the selling strategy is a known before we set out.

Let’s consider some of those examples that I just mentioned. For someone looking to build wealth to fund retirement, the primary selling strategy might be selling their shares when they require the money to live off. In that instance a progressive selldown over many years is the likely pathway.

If you’re investing to save a deposit for a home, then perhaps you have a particular dollar figure that you were shooting for and therefore once your portfolio hits this figure it becomes time to sell. (Allowing for tax of course which we will discuss in a little bit).

If you were investing for your kids education, then you would know when that burden will be inflicted on you and can plan accordingly.

Under the passive income goal your selling strategy may look similar to that of a retiree. Or maybe the hope is to never sell and simply rely on the income production of the underlying investment.

In all of these cases an understanding at the outset of when you will sell is extremely helpful in determining what the appropriate investment strategy should be at commencement. For instance someone saving for a house deposit might expect that to take three years perhaps. The appropriate investments for that sort of timeframe will be quite different to the ideal investments for someone accumulating wealth for retirement 20 or 30 years from now.

Selling strategies linked to your particular goals are largely a whole of portfolio approach. But what about at the individual portfolio component level? How do we determine when it’s time to sell our shares even if in a total portfolio sense, we wish to remain invested? Here we are talking about portfolio reviews.

4 approaches to selling your shares

There are four approaches you could use when reviewing your portfolio and determining whether shares should be sold:

  1. The first is valuation. If you have access to research, which you may get through your broker or by subscribing to a service, they will typically issue a “fair value” estimate with a range either side to recognise that such forecasts are not an exact science. When you review your portfolio, those stocks trading well above estimated fair value could be considered for sale on the basis that if the researcher is correct, we should expect markets too eventually recognise this fair value and trade down towards that level. Of course there’s never a guarantee this will happen. Just because the researcher thinks a stock is worth less than it’s currently trading, doesn’t mean they’re right. The fact that people are happy to still buy at this elevated price tells you that other people have a different view. Nonetheless, selling based on estimates of valuation is a valid approach to determining when to sell your shares.
  2. The second sell trigger could be a significant change in the circumstances that underpinned your reasoning for buying the investment in the first place. Say for instance you bought a thematic ETF that focused on hydrogen production. You bought it because you were bullish on the potential for hydrogen and the belief that this would be a beneficiary from the world weaning itself off fossil fuels. However sometime after you purchased it, a credible report comes out finding that producing hydrogen at a commercial scale could never be achieved commercially and that an alternate technology was vastly superior.

    Here, the world has fundamentally changed. The reason you entered this investment no longer holds up. In such a circumstance it would be perfectly reasonable to sell and find a new opportunity.

  3. Timeframe could be another trigger in you selling an investment. It’s not share specific but in my case my crypto investments will be sold after I’ve held them for 10 years. I have no interest in tracking prices each day and trying to short-term trade, I have a life! I certainly haven’t bet the house on crypto, so the only way my relatively small investment has any significant impact on my life is if the growth is enormous. I figure that if I leave it alone for 10 years either the crypto bubble has burst and my holdings are worthless, or the whole crypto space does indeed become the equivalent of the birth of the Internet, and my early investments are worth a sufficiently significant sum to make a difference to my or my broader family’s life. A binary outcome I suppose.

    You could apply the same approach to your share investments where the rationale for buying was an expectation of a certain thing playing out in the future.

  4. A fourth selling approach could be a percentage gain or loss. Traders for instance might set a stop loss at 10 or 20% down from their purchase price. These can be automated to take emotion away and ensure your intended trades happen even if you’re not looking at a screen. On the upside this could be referred to as a price target. You might buy the investment with the belief that it is fundamentally undervalued by say 20%. That being the case, when you see the price bridge that gap and gain the 20% that you had spoted, then perhaps it’s time to sell and move onto the next opportunity.


The four approaches to selling your shares mentioned above are all logical and somewhat predictable strategic reasons why you might sell your shares. However you could also sell your shares due to an emergency. A key advantage of shares is that they are so liquid. You can place a sell order and have your money in your bank account within the matter of a few days.

Another key advantage with shares is that there’s no necessity to sell an entire holding or an entire portfolio. If you need $10,000 for instance and your portfolio is worth $100,000 then you’re able to retain almost all of your holdings and sell down only enough to meet your particular need, something certainly not possible with a property investment.

This ability to do partial sell downs is particularly valuable when funding retirement. We sit down with clients each year and determine their income need for the year ahead. We then sell down whatever is necessary to ensure the cash is there to cover that 12 month period so that any short term volatility, either in the share price, or in the dividends paid out, would have no impact on their lives.

Tax on selling your shares

No discussion on selling your investments would be complete without a mention of capital gains tax. If you make a profit over the holding period, you will have to share some of that profit with the tax office. I think there are two key things to consider here. The first is that under the current tax regulations in Australia, the amount of assessable capital gains is halved where you hold an investment for longer than one year. If you’re sitting on a big gain, and you’ve held the investment for only 11 months, you might want to contemplate hanging on until you pass through that one year anniversary.

The other thing to consider, which Warren Buffett often references, is that capital gains tax is a rare instance of a tax where you get to choose when you will pay it. People who hold investments for a really long period of time get the benefit of receiving compounding returns on the portion of the investment that at some point would be payable to the government. The person who sold their investments every year or two, gave some portion of the proceeds to the tax office, and then reinvested the rest, would have much less 20 years down the road then the person who was able to hold onto the same investment over that entire period and never have the tax dilution.

Final Thoughts

When you are selling your shares for reasons such as valuation, consider what you will do with the proceeds when they arrive in your bank account. There can be circumstances where the entire market is expensive. Selling that current investment may well lock in a tidy profit for you, but if you then need to pay top dollar to redeploy that cash into the next investment, particularly after sharing some with the tax office, maybe it would have been better to simply stay where you were.

Also, at least in the short term, don’t look back. If you’ve sold, you’re out. It doesn’t matter what the share price does from that point on, so don’t even look. Too much potential for heartache. But that’s only in the short term. The fact that you held and then sold an investment some years back, shouldn’t mean that the investment is forever scrubbed off your potential purchases list. Keep an open mind, things change, and perhaps if it was an investment that you knew well, you may have some great insights into the drivers of its price and therefore when it is under or overvalued.


Check out our Learn page for helpful investment resources.

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