Investment Portfolio Management: The Complete Guide

Stock portfolio management involves buying, monitoring, and selling stocks.

You might have already understood when it’s the right time to buy stocks. But selling is also a crucial component of long-term investing success, and you should closely examine it too.

The issue is that there is no magic formula for knowing when to sell stocks in general. It depends on the strategy that you have chosen and your temperament.

Are you a passive investor investing in the stock market through index funds and ETFs? Or a stock picker who does their own research to invest in individual stocks? How close to retirement are you? Based on what criteria do you buy stocks?

These are all questions that you must consider before you’re able to know when to sell stocks. But fear not. No matter what type of investor you are, this guide will help you remove the confusion that is usually associated with selling stocks.

Let us start by addressing the basis of buying and selling stocks.

Stock portfolio management is the selection, monitoring, and selling of stocks. The approach differs across investors because of the various goals that each one has.

Selecting stocks first serves the construction of a stock portfolio. Second, it is a component of portfolio management that helps you ensure that you reach your goals. At the same time, the continual selection of new stocks to invest in or changes in circumstances demand the removal of some stock positions from time to time.

Both buying and selling stocks are based on your strategy and that, in turn, is based on your investment goals.

The principle behind stock portfolio management is that circumstances change. So, the investors who abide by this principle should manage their portfolios.

In other words, it’s important to always know when it’s the right time to buy and sell stocks so you ensure that your portfolio’s structure is always aligned with your goals.

A set-it-and-forget-it strategy cannot work when it comes to investing your hard-earned cash.

Let us now take a look at two distinct approaches to portfolio management.

Active Portfolio Management

Active investors are looking to perform better than the broad market. In sequence, they actively manage their portfolios (make frequent buy and sell decisions) to achieve that goal.

In simple terms, active portfolio management involves stock picking and being on your guard for any opportunity that will help you beat the market.

This type of portfolio management requires the ability to analyze and value businesses to know when to buy and sell stocks.

Passive Portfolio Management

Passive investors are looking to produce returns similar to those of the market. To do so, they select investment vehicles like ETFs or index funds which are structured to mirror the overall market’s performance.

Because of the simplicity of this approach, managing a passive portfolio is all about the initial selection of the vehicle and systematic investing in it over the long term.

Selling rarely occurs, and when it does, it is based on some asset allocation principle.

It’s time to examine how you manage your portfolio as both an active and passive investor.

As an Active Investor

Active investors usually base their trading decisions on technical or fundamental analysis.

Technical analysts buy and sell stocks based on their past price behavior. It’s way beyond the scope of this guide to get into the intricacies of technical analysis, but a point you need to keep in mind here is that technical analysts will use technical indicators (buy and sell signals) to help them decide when to buy and sell stocks.

On the other hand, fundamental analysts will often buy a stock after their analysis shows that it’s trading below its fair value. For that reason, they also sell a stock when its price increases beyond what they perceive as fair value.

Now, these two approaches to analyzing stocks share two reasons for selling. First, you might have made a mistake in your original analysis, and the stock you initially bought looked better than it actually is. Second, you might need to liquidate your position to invest in a better opportunity.

Another aspect of sound portfolio management is knowing when not to sell. Those who are into trading and technical analysis generally don’t abide by the following principle, but if they’re good enough at what they do, they probably can afford not to.

When Not to Sell Stocks

You should try not to sell the stocks that you have held for less than a year. The reason is taxes.

Gains of stocks you have held for less than a year are taxed as regular income. On the other hand, those you have held for more than one year make your returns eligible for capital gains tax which can be less severe (especially for high-income earners).

So, make sure that you plan to hold your stocks for at least a year. Unless of course, you have made an error in your initial analysis.

Now, many active investors are concerned with rebalancing their portfolios. This practice involves abiding by the rule that you should preserve an equal-weight allocation. In other words, this principle says that each one of your stock positions should account for the same percentage of your overall portfolio.

An example could be when a stock appreciates in value and accounts for a larger slice of the pie. Some investors feel the need to “rebalance” by selling shares of that stock to drive it back to its former allocation level that it previously shared with the rest of the positions.

This is a fine strategy for passive investors who could be holding more assets than stocks (as we will see in a moment). For active investors who shouldn’t equate volatility with risk, it doesn’t make much sense.

The reason for this is that an active investor should be careful enough to pick stocks that are undervalued. If a stock’s price rises to a point where it holds more weight, your portfolio will not become riskier; just more volatile.

That’s not necessarily a bad thing. If the fundamentals of a company suggest that it’s still below fair value, then it’s not likely that it’s riskier than before. That’s why it is essential to differentiate between risk and volatility.

But if a stock’s price falls, rebalancing is justified as you can now buy more of a stock that you perceive as undervalued for less. So, the principle of rebalancing your stock portfolio only makes sense when a stock’s price dives.

As a Passive Investor

A passive investor should manage their portfolio based on their overall asset allocation strategy.

That means that if you are investing in stocks through an ETF or index fund, liquidating a portion of your stock position should serve to free the funds and allocate them to another asset class like bonds or money-market securities.

For instance, your strategy may involve holding 50% of your funds in stocks and another 50% in more conservative securities. It’s usual practice to monitor your positions to sell (or buy more of) securities that have increased or decreased in value (accounting for a larger or smaller portion of your portfolio). This is called “rebalancing” and it’s done for the sake of abiding by your asset allocation targets.

And this is the only reason that selling makes sense when managing a passive portfolio. Asset allocation strategies are too big a subject to thoroughly discuss here; but as an example, the closer you are to retirement, the more you need to have your wealth allocated to investments that are less volatile than stocks.

Thus, gradually selling your stock position as you approach retirement is the only reason to sell your stocks in passive portfolio management. But for some who have different retirement needs and risk tolerance, there may never be a good reason to sell your stocks.

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