It’s important to understand which investments to own, and when to buy them. But you should also know when it’s time to sell an investment — and why.
Unfortunately, many people sell investments for the wrong reasons. Some people want the money to purchase so-called “hot” investments, even if these new investments aren’t appropriate for their needs. Others own investments that have lost value, and fearing further losses, they decide to sell — thereby violating the oldest rule of investing: “Buy low and sell high.”
These types of behavior can lead to at least two major problems. First, if you’re constantly selling investments, you’ll likely incur fees, commissions and taxes that can erode any returns you did manage to achieve. And second, by frequently selling off your investments and buying new ones, you’ll find it difficult to follow the type of consistent, long-term financial strategy that’s essential to help you work toward your goals.
If you shouldn’t sell investments to find quick gains or to avoid losses that may not even occur, when should you sell?
You might want to sell:
If your goals have changed — You bought certain investments because you thought they would help you make progress toward your objectives. But over time, your goals may change, so in response, you may need to sell some investments and use the money to purchase new ones that are more suitable for your new goals. For example, early in your career, you might have benefited from owning investments that offered high potential for growth, but as you near retirement, you may need to shift some — but certainly not all — of your growth-oriented vehicles to income-producing ones.
If the investments themselves change — You might have bought a stock because you liked the company’s products, business plan or management team. If any of these factors change significantly, though, you might need to re-evaluate your ownership of this investment.
If you need to rebalance your portfolio — You may have decided that your investment portfolio should be composed of specific percentages of stocks, bonds and “cash” instruments. But due to changes in the value of your investments, these percentages can shift somewhat, resulting in a portfolio that no longer reflects your goals and risk tolerance. If that happens, you’ll need to rebalance your holdings, which may require you to sell some of your investments.
If an investment has chronically underperformed — Sometimes, an investment simply doesn’t perform as well as you had hoped. When this happens, you may be better off by selling the investment and using the money to pursue new opportunities. However, don’t rush to judgment. Before you sell an underperforming investment, try to determine why it hasn’t done well. Is it because the market as a whole has slumped? If so, your investment could rebound when the market does. Or are there separate factors, unique to this investment, that have caused its problems? If the investment’s fundamentals and prospects still look good, you might want to simply give it time to prove its worth.
By knowing when you should hold an investment, and when you shouldn’t, you can avoid costly mistakes and help improve your chances for long-term investment success. So think carefully before putting up the “For Sale” sign on your investments.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.