How To Define Your Investment Strategy

If you need more income than you can safely earn on your investments, you will also have to consider liquidating investments over time. See Spending My Savings to get an idea of how much you can spend, based on how much money you have, how long you need it to last, and the return on your investments.

When deciding which investment to liquidate, consider the following:

• Taxation: How much tax will you have to pay on your investment if you sell it? If you are selling a mutual fund whose value has grown since you purchased it, you might be subject to capital gains taxes. Selling bonds or other cash-type investments might not generate a capital gain at all.

• If you sell an investment and suffer a loss, some of the loss might be deductible from your gross income on the tax return for the year in which you sell.
• If your income is so low that you don't pay any taxes, or you are in the lowest tax bracket, taxes might not be a consideration.

• Market Timing: Consider where the price of your investment is currently compared to where you believe it should be or will be in the future. Is it temporarily undervalued? Overvalued? If undervalued temporarily, you may want to hold it for a comeback. If it is overvalued, this may be a time to sell.
• Your Portfolio: How will the sale of your investment affect the balance in your portfolio? If you sell one type of investment, the proportion of the other investments will increase. For example, if you have 50% stocks and 50% bonds, and sell all the bonds, you'll end up with a riskier 100% stock portfolio. Is this what you want?
• Payout Dates: Be careful not to redeem an investment before a payout date. For example, redeeming a savings bond one day early could result in a loss of six months' interest.
• Estate Planning: Investments that are inherited receive what's called a "step-up" in basis (the cost of an asset for tax purposes.) Instead of the basis you have in an investment, the basis for your heirs changes to the estate valuation. For example, if your heirs inherit a mutual fund worth $5,000 that you purchased for $1,000, they will only have to pay tax on the increase in value above $5,000. On the other hand, if you sell the fund when it is worth $5,000, you'll have to pay tax on $4,000 ($5,000 value minus $1,000 cost).

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