The goal of investing is to increase your position, whether that's with stocks, bonds, real estate or any other type of investment. Divesting is the opposite: It's when you offload assets, which you may choose to do for a number of reasons.
Think of divesting as trimming your investment portfolio and dialing back your exposure. When done strategically, it could help balance out your investments and better support your financial goals. Being intentional is key; otherwise, you could end up with a lopsided financial portfolio.
What Does Divesting Mean?
Divesting applies to the corporate sphere and to individual investors.
- Corporate divesting: This is when a company sells off certain assets; usually a portion of the business. That might be an underperforming segment or a business line that no longer supports the company's vision. If you're a business owner who's looking to retire or simply move on to something new, divesting might be part of your exit strategy.
- Individual divesting: As a regular investor, divesting involves selling various assets. For example, you might choose to sell all the stock you have in a particular sector or industry. Investors can divest in a big way or on a smaller scale to adjust their financial portfolio.
Let's focus on divesting as it applies to your individual investment portfolio.
When to Consider Divesting
Most investors will divest from certain assets at some point. After all, if you held on to your investments forever and never sold them, you could miss out on potential gains. Below are a few situations when you might consider divesting.
Your Investment Timeline Has Changed
The general rule is to carry more risk in your portfolio when you're younger and have more time to recover from periods of market volatility. If the market dips and your portfolio decreases in value, chances are it'll bounce back up again over time. The S&P 500 is a great example. Over the past century, this stock market index has seen average annualized returns of about 10%. If you're younger, divesting might mean swapping out some low-risk investments for high-return assets that carry more risk.
Divesting will probably be done in reverse if you're in the run-up to retirement or are already retired. If a big portion of your wealth is tied up in the stock market, your retirement income could be exposed to a lot of risk.
You're Rebalancing Your Portfolio
Rebalancing is when you adjust your portfolio to match your desired asset allocation. For example, your goal might be to hold 60% stocks and 40% bonds. Even if you set up your portfolio this way, the values of your assets could move up and down over time—and indirectly affect your allocation. Rebalancing involves buying and selling different investments to set things right again. It's good practice to rebalance annually or every quarter. You can also do it if your asset allocation changes significantly.
You Want Your Portfolio to Better Support Your Values
Socially responsible investing is about building a portfolio that's in line with your beliefs and morals. Divesting can involve selling shares of companies that don't share your values. That might be companies that:
- Are not committed to their environmental footprint
- Are rumored to have a toxic work environment
- Have a history of sexual harassment allegations or human rights violations
- Do not prioritize diversity, equity and inclusion
Strategic divesting can allow you to drop investments that go against your values and trade them for ones that feel better aligned. That could set the stage for a win-win. Your financial support could help the company grow and do more good in the world—and your portfolio might also increase in value.
Learn more >> What Is ESG Investing?
Downsides of Divesting
While divesting can have benefits, there are also downsides to consider.
- Will divesting affect your taxes? If you sell an asset for more than you paid for it, you'll realize a capital gain. That's a good thing, but keep in mind that you'll be taxed on these earnings. A large divestment could trigger an unexpected tax bill. The amount you'll owe depends on your income, tax-filing status and how long you held the investment. Capital gains tax is higher if you've had the asset for less than one year.
- What does your risk tolerance look like? Divesting comes with some degree of risk. Depending on your approach, it could lead to lost returns over time. A financial advisor might suggest other strategies to help you mitigate that risk.
- How will divesting impact your retirement plan? Think carefully before divesting too much from the stock market in retirement. Investment returns can help your nest egg keep pace with inflation. If you're in your 60s, holding 50% stocks and 50% bonds, for example, can keep you in the game without exposing you to too much risk. In your 70s, you might go down to 40% to 60% bonds, 30% to 50% stocks and up to 20% cash, according to T. Rowe Price.
Steps to Divest Your Assets
Once you decide to divest your assets, follow these steps:
- Ask yourself why you want to divest. The desire to decrease your exposure to risk is very different from wanting to divest from a company that goes against your values. Your reason for divesting can guide your exit strategy—and help you decide what to replace those investments with so that you stay on track with your goals. Begin by clarifying the type of investments you want to get rid of.
- Check in with a financial professional. A financial advisor can be a helpful resource when divesting. They can look at your long-term goals and suggest the best strategy. A stockbroker or full-service brokerage firm can also provide guidance.
- Come up with a strategy. Decide on a plan before you start offloading assets—and get clear on how you want your portfolio to look when it's all done. What will you replace those assets with? How will you navigate the potential tax repercussions of divesting? How will current market conditions and interest rates affect your approach?
- Divest intentionally. Once you've clarified the points above, it's time to divest. This involves selling certain assets in your portfolio. That might include stocks, bonds, a business or a rental property. The next step will likely be purchasing new assets that better support your financial goals, risk tolerance and timeline.
- Keep an eye on how things go. After divesting, track your portfolio's performance to see how things are playing out. You might choose to make additional changes, depending on market conditions.
The Bottom Line
If investing is one side of the coin, divesting is the other. It involves selling off different assets for any number of reasons. Regardless of what that is, you'll want to make sure to divest in a way that's strategic and considers your long-term financial plan. Working with a financial professional can go a long way.