It's never nice to see our ASX shares go down in value, but there could be times when it's good to consider selling.
I think it is important to mention the psychological elements of the decision. Loss aversion is the concept that we feel the pain of losses more than the joy of gains, but we shouldn't let that stop us from moving on.
Share market volatility happens, sometimes a wide array of ASX shares and sectors go through declines like we saw during the COVID-19 crash and a couple of times during 2022 when investors were fearful about inflation and rising interest rates. During those widespread declines, it pays to be patient.
I'm going to talk about some of the reasons why it could make sense to sell ASX shares.
More declines expected
Market crashes do happen with the S&P/ASX 200 Index (ASX: XJO). I'd hope a wide market recovery happens sooner rather than later. But, individual businesses that are facing a permanent issue (not something cyclical) may see the share price keep falling over the long term, so it could be better to exit the business.
Not every single ASX share is going to go up just because we own it. We shouldn't anchor our thoughts about what a business is worth today to its former share price – that's the past.
Remember, we don't need to make the money back we've lost with the same investment that has declined. It could be a wise move to change to another investment.
Better opportunity
Not many people have piles of cash sitting around and waiting to be invested. It could make sense to sell if an investor has identified a much better opportunity.
But, it's also worth saying that investors shouldn't be too frequent with changing their investments. It's probably not helpful if someone is constantly switching their investments. After all, there's not much point in paying excessive brokerage costs.
In a situation where a business like Xero Limited (ASX: XRO) falls 50% just because investors are fearful of ASX tech shares, I'd want to jump on the opportunity. So, if I owned a defensive ASX share such as Woolworths Group Ltd (ASX: WOW) that had only dropped 5%, it could be profitable to switch over because a rebound for Xero shares would yield a greater return (as we've seen this year, on the chart below).
Need the cash
If an investor needs cash and there's no other source of money (like an emergency fund), then it may be necessary to tap our portfolio for cash. It's not ideal to sell shares at a loss just to access money – that's why it's useful to have something set aside for a 'rainy day'.
As an example, if someone needs money to replace their car (which they use for work) then it could make sense to sell.
Someone looking to invest in their education could also unlock more wealth by putting capital into an important course or degree, increasing their earning potential.
Offset gains
No one wants to make losses, but they can be useful to offset capital gains, which reduces the tax owed position.
However, investors need to ensure they are not engaging in 'asset wash sales', which is where someone sells assets like crypto or shares just before the end of the financial year and after a short period of time they buy back the same, or substantially the same, assets.
Foolish takeaway
I'd prefer to always make gains on my ASX shares, but there are times when it could make sense to sell. In the past, I have made some sales because I wasn't confident about an ASX share's future.
