When does divestment make sense for your portfolio?

Sometimes maintaining the health of your investment portfolio is a lot like cleaning out your closet after a long winter. It’s time to part ways with things that no longer fit your life and buy more of what does.

That’s how divesting, the “spring cleaning” of companies and portfolios, works too. Divesting is the process by which you sell assets you don’t want to own anymore for financial or perhaps ethical reasons.

When to consider divesting

There are a few reasons why you might choose to shed certain assets in your portfolio.

• To rebalance your portfolio: Maintaining diversification within a portfolio is important to avoid pitfalls such as concentration risk. This is when a large portion of your portfolio is invested in a single asset. It’s the classic example of putting all your eggs in one basket. Imagine holding only Blockbuster stock in the 1980s and not diversifying to buy Apple stock too.
• To strategize taxes more efficiently: Some investors use a strategy called tax-loss harvesting, which involves selling securities at a loss to offset capital gains taxes.
• To adjust an investment strategy: Sometimes an individual, or whoever manages the portfolio, wants to tweak the investment strategy for various reasons, such as adjusting to different goals or a time horizon.
• To align with your beliefs: You may decide that you don’t align with specific companies and how they conduct business anymore and don’t want them in your portfolio. For example, maybe you don’t want to continue to invest in companies that use fossil fuels.

What divesting might look like for you

Divesting isn’t a one-size-fits-all approach for investors. Just as there are times to buy different investments, there are different reasons and seasons to divest.

These are a few examples of when divesting may be right for you.

• Retirement is on the horizon: You may want to divest from your more volatile holdings, such as stocks, and move that money into bonds that carry less volatility to ensure that you have money for today and tomorrow in retirement.
• Retirement isn’t on the horizon: And your investments are too conservative, so you move money out of bonds and into stocks, for example.
• You want to diversify your portfolio: You sell single stocks to invest in exchange-traded funds or mutual funds and spread your risk across dozens, even hundreds, of companies instead of going all in on a smaller pool of investments.
• Your investing values change: To reflect your values, you may divest holdings that aren’t objectionable but don’t actively support your values to put money into ones that do, such as exchange-traded funds focused on gender equity in the workplace and company leadership.

4 steps to divest assets

Once you’ve decided it’s time to divest certain assets, it may be helpful to follow these steps.

1. Consider individual goals, risk tolerance and time horizon: When changing anything in your portfolio, think about what your long-term goals are and how you feel about taking risks. Do you want to save for an emergency? Buy a new home? Invest in industries you care about? Grow a nest egg for retirement? 
2. Assess the market: If your goal is to mitigate losses or increase earnings, you may want to take a peek at the market first. Look at factors such as the current interest rate levels and market conditions for particular assets.
3. Pick a strategy and sell: If you simply want to shed some assets to avoid concentration risk, for example, or focus more on a high-growth and tech-heavy portfolio, then consider selling assets that don’t align with that strategy. Same idea if you’re shifting to ESG investing.
4. Monitor performance: If you’re actively managing your portfolio, keep an eye on how performance has been impacted by these changes and adjust accordingly.

Bottom line

Divesting is when an investor chooses to get rid of, or move, assets within their portfolio that may not fit their individual needs anymore. This can happen for several reasons, but there are times to divest that make more sense than others. Before you make any moves, take time to consider whether or not divesting part of your portfolio makes sense for you and your financial goals.