After a lifetime spent building a portfolio, you'll eventually
have to deconstruct it, steadily selling off your holdings until
they're nothing left. Simply unloading stocks in a random fashion
ensures that you'll leave money on the table. Here's a helpful
primer on when to begin, how to proceed, and how to make mid-stream
The Age-Inverse Rule
Let's face it, stocks are risky investments. And as we age, our
desire for risk diminishes as we'd like to ensure that there's
plenty of money around, even if the stock market heads south.
Financial planners suggest you follow the age-inverse rule.
Subtract your age from 100, and that's how much of your
should be tied up in stocks.
## For example, a 65-year-old should have their exposure down to
35%, and keep reducing their exposure to stocks from there. Some
planners suggest you include home equity in the calculation of your
net worth, while most simply suggest focusing on
investments like stocks, bonds and Certificates of Deposit (
A Fresh Look
When it comes time to start selling off various stocks, you'll need
to forget the past. Unloading stocks that have already risen in
value while hanging on to stocks that have languished is a mistake
that many investors make. Instead you should look at all of your
stocks and analyze them as if you don't yet own them. The stocks
that look least appealing -- and hence are least likely to rise in
value in future years -- should be the first ones in your selling
It's also wise to hang on to your dividend-paying stocks as long as
possible. Not only are these stocks more stable when markets turn
treacherous, but those
streams can continue to help generate extra income when you're
The Taxman Awaits
Once you've arranged your holdings into some sort of pecking order,
you'll need to limit how much you actually sell in any given year.
capital gains tax
rate is just 15% right now, it's likely to be raised to 25% or even
35% in coming years as Washington seeks to raise revenue. If you
sell $100,000 in stock in a few years, you may be looking at a
$25,000 or even $30,000 tax bill.
To offset that tax bite, you may want to selectively pair your
winners with your losers so the capital losses shield the capital
gains. Financial planners suggest you maintain a spreadsheet of all
of your stock investments, tracking what you paid for each stock
and your current
or loss in each name. Match up a $10,000 gainer and a $10,000 loser
and you'll owe no taxes (as long as the matched stocks are in the
same long-term (one year or longer) or short-term
Of course, if you hold your investments in a tax-sheltered
retirement plan, then different rules apply. You can start selling
stocks without any tax consequences when you turn 59 ½ but you must
start selling by the time you reach 70 ½.
Selling into Rallies
Nobody likes to leave a party when it's really rocking. Yet that's
precisely the best time to sell -- even if the party goes on a bit
Investors that had the fortitude to sell stocks in the late 1990s
were best able to sleep at night when the eventual pullback
arrived. The converse is also true. If the market slumps deeply, as
it did in late 2008 and early 2009, then you're best off sitting
tight and waiting out the storm. Sadly, many investors fled the
market when it plunged and have missed the subsequent sharp rebound
that has seen the S&P 500 double in value from the March 2009
The Annual Tune-Up
Once your plan is in place, you'll need to keep fine-tuning it. If
you've decided to hold off retirement a bit longer, then an
automatic decision to sell stocks every year may not make sense.
And those stocks you've lined up in order of appeal? Well, you'll
have to re-check your assumptions annually to see what makes sense
to hold and what to unload.
For example, when
Ford Motor (
surged to nearly $20 in early 2011, many investors were tempted to
take profits. Then again, with shares now back down to $13, Ford is
no longer an obvious source for profit-taking.
The Investing Answer:
If you follow these steps, you may still have your feet in the
market well into your 80s. But by then, most of your money should
be tied up in safer assets such as bonds and CDs. Right now, these
financial instruments offer paltry payouts, and it's understandable
to want to transition to them slowly. Yet it pays to watch interest
rates. As they rise, you should become prepared to sell stocks. If
rates rise by a significant amount -- toward levels seen back in
the 1970s, the argument for owning stocks becomes even less
With all of these variables to monitor, it's clear that your
financial maneuvering doesn't end simply when you decide to stop
buying new stocks.