Raising Cash

"He's right, you know, I had to sell. The key to the game is your capital reserves. If you don't have enough, you can't piss in the tall weeds with the big dogs."
--Gordon Gekko (Wall Street)

Although investing involves acquiring financial assets and holding them for long-term payoff, every now and then investment positions may need to be liquidated to raise cash for urgent near-term matters. For example, portions of an investment portfolio may need to be sold to free funds for extinguishing unwanted debt.

Suppose that you hold a stock portfolio with 40-50 positions, many of them inherited, in a taxable brokerage account and you want to sell some holdings to raise cash. How to determine what to sell? A few thoughts:

1) Know what you own--and what you don't want to own. Review the names in your portfolio. What companies do I own? What industries are they in? What are their dividend yields? Be on the lookout for positions that you're not happy with. Some companies may be making strategic mistakes that are weakening their competitive position. Kraft Heinz Co (KHC) was a holding of mine that I thought fit this category. Some companies may be operating in sectors that don't excite you. Lack of enthusiasm for the tobacco and military sectors caused me to look hard at positions in Altria Group (MO) and Lockheed Martin Corp (LMT) when I wanted to raise cash. If you identify positions that you don't feel good about, then these are prime candidates for sale.

2) Are any holdings grossly overvalued? Reflect on the valuations of your holdings with a focus on positions that appear over-priced. Be aware, though, that valuation is a tricky exercise and that general conditions of overvaluation are usually NOT good reasons to liquidate. Stock prices sometimes get ahead of themselves a bit because the story is good and improving. In most cases, it pays (literally) just to hold on and enjoy the ride. Trading in and out of names based on point estimates of valuation is often a losing game. However, in some cases a security's price has been bid so far to the moon that it might make sense to sell. As solid as the company is, the current valuation of Microsoft (MSFT) prompted me to sell a couple months ago at what I perceived to be an extremely rich valuation. I may be wrong, of course (the stock price is up 10-15% since I sold it). But exchanging my MSFT shares for cash was a worthy trade for me at this juncture. Plus, there is nothing stopping me from buying the stock back should things change in the future.

3) Look for opportunities to pair capital gains with capital losses. In a taxable brokerage account, when you sell stocks that have appreciated in price, you will be obligated to pay taxes on the 'capital gains.' However, tax liability can be reduced if you offset capital gains with losses from positions sold for less than their purchase price. For example, I sold some of my losing position in Gap Inc (GPS) earlier this year to offset gains realized by selling winning positions like MSFT discussed above. Every now and then, it makes sense to prune losing positions to obtain a 'tax asset.'

4) Strive for a manageable number of positions. The higher the number of stocks in a portfolio, the greater the degree of diversification, BUT the harder it is to keep track of all positions. Personally, I've found that ~30 positions is my limit. Beyond that, I struggle to stay on top the news flow vital to ongoing fund management. When raising cash, there may be opportunity to reduce portfolio positions to a more manageable number.

Selling can be a hard thing to do. Assets that you've owned--particularly those that have been productive--are often difficult to let go. When done in taxable accounts, the tax bite can also sting. When thoughtfully done, however, raising cash from an investment portfolio can be a healthy exercise. Not only does it enable the funding of immediate needs, but selling also serves to prune and streamline a portfolio so that the remaining assets work better for you in the future.

position in GPS