When does divestment make sense for your portfolio?

Just like cleaning out your closet after a long winter, maintaining the health of your investment portfolio requires letting go of things that no longer serve you and investing in what aligns with your life.

Divesting, often referred to as the “spring cleaning” of companies and portfolios, involves selling off assets that no longer fit your financial or ethical criteria.

When to consider divesting

There are various reasons why you might consider divesting certain assets in your portfolio:

• To rebalance your portfolio: Diversification is key to avoid concentration risk and ensure your investments are spread out. Think of it as not putting all your eggs in one basket, like holding only Blockbuster stock in the 1980s without diversifying into other assets.
• To strategize taxes more effectively: Some investors utilize tax-loss harvesting to offset capital gains taxes by selling securities at a loss.
• To adjust your investment strategy: Changes in goals or time horizons may prompt a need to tweak your investment strategy.
• To align with your beliefs: If certain companies no longer align with your values, you may choose to divest from them. For example, divesting from companies that rely heavily on fossil fuels.

What divesting might look like for you

Divesting is not a one-size-fits-all approach. There are different reasons and seasons for divesting, just as there are for investing.

Here are a few scenarios where divesting may be appropriate for you:

• Retirement is approaching: Transitioning from volatile stocks to more stable bonds to secure your financial future in retirement.
• Retirement is not near: Moving from conservative investments to stocks for potential growth.
• Diversifying your portfolio: Swapping individual stocks for ETFs or mutual funds to spread risk across multiple companies.
• Changes in your values: Divesting from holdings that don’t align with your values and investing in companies that support causes you believe in.

4 steps to divest assets

When it’s time to divest assets, consider these steps:

1. Consider your goals, risk tolerance, and time horizon: Think about your long-term objectives and risk preferences when making changes to your portfolio.
2. Assess the market: Evaluate market conditions and factors like interest rates before making decisions to mitigate losses or increase earnings.
3. Pick a strategy and sell: Sell assets that no longer align with your investment strategy, whether it’s to reduce risk or focus on specific sectors.
4. Monitor performance: Keep track of how your portfolio performs after divesting assets and make adjustments as needed.

Bottom line

Divesting involves removing or reallocating assets in your portfolio that no longer suit your needs. Whether it’s for rebalancing, tax efficiency, strategy adjustment, or aligning with your values, there are strategic times to divest. Before making any decisions, consider if divesting aligns with your financial goals.