29 Sep The best time to sell stocks

Q. What’s the best time of year to sell stocks? If I want to sell from my IRA once a year so I can take a distribution, is there a better time to do it?
— Not a trader

A. When to sell stocks? If there was a perfect formula, everyone would be doing it.

There are as many theories about the best times to buy or sell stocks over the course of the year as there are exaggerations in an election year – way too many to count, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

He said some of the theories are rooted in some fact, although that doesn’t mean the timing is always going to work.

For example, Rossi said, a lot of Wall Street professionals say, “Sell in May and then go away,” paying homage to an old English saying where traders and bankers took the summer months off to escape the heat of the city. He said the markets would inevitably slip with no one there to participate in the trading process.

“It’s very different now with electronic trading and constant access to the markets — plus we have air conditioning,” Rossi said. “The strategy wouldn’t have worked this year. From early June until the end of August this year, the S&P 500 index was up almost 3 percent. That’s a good chunk of change to leave on the table.”

Rossi said the best time to sell really depends on your needs and your situation.

He said if you need cash during the year, then you have no choice but to liquidate part of your portfolio and take a distribution.

If there’s a case when you need the cash — as opposed to not needing it and you are only taking a distribution because of the Required Minimum Distribution — he said you might consider setting up a periodic liquidation and distribution so you’re selling and taking a distribution on a consistent basis, perhaps quarterly.

“That way you’re selling at different points during the year so your average sell price is averaged, and you won’t be selling at the low of the market or the high — kind of like dollar cost averaging in reverse,” Rossi said.

He warns if you choose to do that, you need to be cognizant of transaction costs. That’s because the more times you sell a security, the more commission or transaction fees you will be charged.

Rossi said there is some benefit to waiting later in the year to sell any positions because of the return that is generated from dividends and interest generated from the portfolio.

“Most stocks pay dividends four times per year, and many mutual funds pay on a similar schedule. Mutual funds will also distribute their capital gains at year end,” he said. “If you don’t reinvest mutual fund dividends and capital gains, and just have them go into cash, you may have enough cash generated from your portfolio so that you don’t have to sell anything.”

An additional thing to be aware of when liquidating a portion of your IRA, no matter if you do it once a year or throughout the year, is the asset allocation of your portfolio.

For example, Rossi said, if your portfolio is structured to maintain a balance of 60 percent equities and 40 percent bonds, selling all stocks will decrease the equity portion and increase the bond portion making the overall portfolio more conservative and giving you less exposure to the equity markets.

“When selling, do it proportionally from the your different asset classes; doing so will allow you to keep your asset allocations intact, which could help limit the amount of rebalancing required later,” he said.

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This post was first published in September 2016.