The financial media is filled with information and recommendations on which investments to buy and when to buy them. Much less common is the flip side of the transaction. When is the right time to sell your investments?
I suppose the reason why this question doesn’t get more play is because it sounds pessimistic.
And pessimism isn’t a welcome attitude in the investment universe.
Logically though, if buying the right investment sets you up to make large profits, selling that investment is when you collect said profits. That’s not pessimistic at all! So when is the right time to sell your investments?
When You Make a Large Profit
Just because a stock or a fund was a bargain three years ago doesn’t mean it is today. If the price has doubled or tripled in that time, you made a big profit, and that’s always a good time to move out of any investment.
In fact, one of the biggest mistakes investors make is falling in love with their investment choices. They ride them to new highs, but then trace them back on the downside.
The fact that you have made a big profit on investment is not an automatic signal to get out of it. But it is an excellent time to start considering the possibility.
Your Investment is Still Desirable
Any investment can begin to sour at any point in the process. Even if it has provided generous returns up to this point, circumstances are always changing and that can turn a winner into a loser quickly.
No matter how well an investment is doing on a price basis, you should never ignore the fundamentals. If the company is showing declining revenue compared to competitors, or certain product lines are no longer competitive, it may be time to get out.
This is even more true if the price of the investment has increased substantially. Virtually every investment will rise to the point where the fundamentals no longer support the price.
It’s important for every investor to be able to spot when this happens, and be ready to exit the investment.
Is the Market Top Heavy?
It is impossible to separate a single investment from its overall market. This is because most individual investments tend to track the overall market.
Even if an investment looks fundamentally sound, if its market looks overpriced in general, it may be time to get out of that investment, or at least reduce your position in it.
When Better Investments are Available
Virtually every investment carries with it an opportunity cost, or the prospect of what else you could be doing with the money you are holding in a particular investment.
Sometimes while you are loaded up in certain investments, others become more attractive. If that’s the case, you may want to sell off certain investment positions –- or at least reduce them substantially –- to free up capital to get into more promising investments.
Market cycles change. Today’s top-performing investments are tomorrow’s dogs, and today’s dogs are tomorrow’s high fliers. Being able to make this transition smoothly is a true art form, but one that can reap tremendous profits if you are able to master it.
Today’s undervalued investments often become tomorrow’s winners. While you don’t want to be turning your investment portfolio too frequently, you do want to maintain some flow of exiting today’s top performers, and using the capital to invest in future performers.
It’s Time to Reduce Your Risk
There are also lifestyle factors that can affect the timing of when to sell your investments, even though they have nothing to do with the specific investment or the market in a direct sense. There are simply times when you need to reduce risk in your portfolio in order to match it with the place you are in life.
Retirement is such an event. If you have been heavily invested in equity investments up to the point of retirement, you’ll want to begin moving money out of risk investments into more secure ones.
The basic idea is to reduce portfolio volatility because you (a) will likely need to begin withdrawing money from your portfolio, and (b) since you will no longer have an earned income, it will be more difficult to overcome serious market declines.
Retirement isn’t the only lifestyle event that could require selling investments. It could be brought on by the birth of the child, or even the move from a salaried job to self-employment.
Either situation could cause you to need to reduce the risk that is caused by maintaining certain investments.
None of these situations should cause you to indiscriminately abandon equity investments.
Both inflation and the need for more money are constant traveling companions in life, and equity investments are the best way to keep pace with them.
What criteria do you use to sell your investments?