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Throughout our lives we save for our retirement. It is at this time of our lives that the need for income and liquidity becomes a priority. So just how does a portfolio generate enough cash, and what kind of investment strategies do we need to implement, to make sure we can always pay our monthly bills?

WHEN YOU HAVE A SHORTFALL IN INCOME

Every now and again, a well-planned and diversified portfolio of dividend-paying shares, property, and fixed-income investments disappoints due to unexpected market disruptions. When an investment strategy focused on generating income for living expenses fails to create the yields needed, it is necessary to look at liquidating some of your capital assets.

But selling assets requires careful planning and market expertise to ensure you are selling the right assets, for the right reasons, and for the best returns. It is important to understand exactly why you are selling and what you hoping to achieve.

Here are some points to consider before deciding which assets to liquidate.

INVESTING “OUT”

Conversations on investing usually focus on where to invest or what to invest in. Advice is freely available on where to put your money for the long term, and there is no better conversation starter than a great share, property or currency gain.

However, rarely do we hear about an investment you should “sell out of” due to exceptional gains being made. Reasons why investors would sell out of an investment include capital growth which has exceeded expectations, high valuations, or an investment representing an over-exposed position in a portfolio. These situations can be used to increase liquidity or to re-align a diversified strategy.  

SELLING FOR LIQUIDITY

Selling an investment is easier said than done. Investors become emotionally attached to a company, a market or a sector. This is especially true when the asset has made substantial gains for the investor. But when you do need cash, taking an objective view on your overall portfolio, while recognising your need for liquidity, should help you make the best decision for your needs.

The first assets on the list to sell should be overvalued asset classes, or shares that have become too expensive. Next are those that have typically become too big in a portfolio and dominate the investment outcome. Concentration risk, which is considered one of the biggest risks in a portfolio, should be top of mind when liquidating assets.

Another time to sell is when markets present opportunities to make a significant profit. These include periods such as the technology boom in the late 1990’s and early 2000, the dramatic depreciation of the rand at the end of 2001, and the property boom in the mid 2000’s.

However, when liquidating assets, it is very important to consider the tax implications of the sale of these assets and what capital gains will be realised. As such, careful planning is needed when capital assets are sold. Spreading the sale over consecutive tax years should be considered, as well as how realising capital losses, like the downside surprises in a share portfolio, can be used to offset the gains made elsewhere.

Finally, a small investment which has lost value to an extent that it cannot make any difference in a portfolio, should also be up for sale.

SELLING YOUR MOST TREASURED POSSESSIONS

Generating cash from a portfolio necessitates a hard look at the balance sheet across all asset classes, including lifestyle assets, collectables, stock market investments, and other physical assets.

When the need for cash dictates you sell a prized possession like an investment property, a holiday home, gold coins, an expensive piece of jewelry, or a valuable piece of art, you have to detach yourself from the emotional reasons for holding onto it.

These investments often fail to provide a decent yield or bring in any income at all. Once you make the rational decision to sell, based on your historical returns, there’s often no better asset to sell to provide for your income needs.        

PLAN BEFORE THE NEED FOR CASH

To prevent any future negative outcomes from the sale of assets, our approach to ensuring steady cash flows for our clients through their portfolio, has always been to start by planning the most likely path of future expenses (both regular and ad-hoc), future cash inflows, and then plot these against the investment portfolio. Understanding your personal financial roadmap and selling the right assets at the appropriate time, will ensure you always have enough cash to maintain your lifestyle in the manner you have become accustomed to.

Written by Riaan Campbell, Citadel Advisory Partner