Who Should Sell Stocks?
34 Pages Posted: 7 Sep 2014 Last revised: 2 Nov 2017
Date Written: September 21, 2017
Never selling stocks is optimal for investors with a long horizon and a realistic range of preference and market parameters, if relative risk aversion, investment opportunities, proportional transaction costs, and dividend yields are constant. Such investors should buy stocks when their portfolio weight is too low, and otherwise hold them, letting dividends rebalance to cash over time rather than selling. With capital gain taxes, this policy outperforms both static buy-and-hold and dynamic rebalancing strategies that account for transaction costs. Selling stocks becomes optimal if either their target weight is low, or intermediate consumption is substantial.
Keywords: transaction costs, dividends, long-run, portfolio choice
JEL Classification: G11, G12
Suggested Citation: Suggested Citation