An important part of any investment strategy is to develop a methodology for ultimately selling your investments. Unfortunately, many investors sell based on emotional factors, making one of several mistakes:
Holding on to an investment with a loss. Psychologically, it’s difficult for investors to sell an investment with a loss, preferring to wait until the investment at least gets back to a break-even level. However, that may never happen or may take a long time to do so. Take a hard look at the investment and consider selling if you can reinvest in an investment with better prospects.
Hanging on to capture more gain. When an investment has increased dramatically, you may be reluctant to sell it, even if you feel its price has gone too high too fast. There’s always the risk that you’ll sell and the price will keep going up. But sometimes it’s best to protect your gains and sell while you’re ahead. At least consider selling a portion of the holding and reinvesting the proceeds elsewhere.
Not setting price targets. One way to take the emotion out of selling is to set high and low price targets for reevaluating an investment. You don’t have to sell when the investment reaches those targets, but at least review it. Sticking with rigid rules for selling when an investment declines by a certain percentage can help prevent substantial losses. Stop orders can help with exchange traded investments like stocks and ETFs.
Trying to time the market. It’s difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell stocks based on those daily fluctuations is difficult.
Worrying too much about taxes. Taxes can consume a significant portion of your investment gains. Even if you have long-term capital gains, 15% of your gain will go to capital gains taxes. However, avoiding taxes may not be a good reason to hold on to an investment. There are typically strategies that can be used to offset the tax burden, but there’s not much you can do about a loss in investment value. In this market environment you may have several holdings that show a paper loss. It can make sense to realize some of those losses to offset current or future gains as part of your periodic portfolio rebalancing. In general, if it’s time to sell an investment, you should probably do so.
Not paying attention to your investments. Your portfolio needs to be evaluated on a periodic basis or you could miss signals that it may be time to sell. You should reevaluate an investment when the company changes management, when the company is acquired by or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock. This applies to mutual funds as well. Manager changes, a dramatic increase or decrease in assets under management, or a deviation from its stated style should all be red flags that cause you to evaluate whether it may be time to sell the fund.
If you are uncomfortable reviewing your investments it may make sense for you to engage the services of a financial professional to take an independent third-party look at your portfolio.
Please feel free to contact me with your investment and financial planning questions.
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