“How do I know when to sell one of my investments?”
In investing as in life, one of the hardest things to do is know when it’s time to part ways with something you once loved. You may be hanging on hoping that things will turn around and things will be like the good ‘ol days once again, but more often than not that just doesn’t happen. Selling an investment isn’t something that should be done on a whim. So how can you tell if it’s time to part ways with an investment you once loved?
1. The Fundamentals Have Changed
We all have reasons why we bought a stock or fund. A great business model, potential for huge growth, a trend of increasing sales, etc… Before deciding to sell go back and look at the fundamentals of the business again. If something has fundamentally changed for the worse, it may be time to sell.
A new law that will restrict growth, a new competitor that is out maneuvering or innovating, a change in leadership/direction, a dividend cut, and serious scandals are all examples of fundamental changes that can be signals to sell an investment. In 2007 I owned Bank of America stock. When the financial crisis hit I held on to my shares, hoping that BoA wouldn’t be heavily affected or involved. Once it became clear that Bank of America was a major player in the collapsing financial system I unloaded my shares. Sure, I took a loss on my investment, but it became clear that the fundamentals of BoA had changed for the worse and holding onto those shares hoping for a rebound would have been like clinging to straws while drowning. It just wasn’t worth the opportunity cost of not putting my money to work somewhere a little less toxic.
Notice “missed estimates on the latest earnings report” isn’t on the list. That’s because a bad quarter here and there happens to every company. One bad quarter shouldn’t be a reason to sell for a long-term investor. If the company starts stringing bad quarters back to back then it may be time to re-evaluate, but one quarter shouldn’t be reason to panic. (For more, check out: Why Quarterly Earnings Reports are Bad For Investors)
2. The Investment Is Underperforming
Now while one bad quarter, or even one bad year isn’t necessarily a reason to dump your investment, consistent underperformance is. Not long ago we discussed finding a benchmark for you investment performance, if your portfolio is constantly underperforming your benchmark it’s time to make some changes. Likewise, if an investment is constantly underperforming its peers it may be time to look elsewhere.
On average about 57% of actively managed mutual funds don’t outperform the market over a 5 year period. If you own one, ask yourself exactly what you’re paying those crazy fees for! If you have a stock or a fund that has underperformed on a consistent basis, dump it and get your money into something better (like a simple index fund).
3. Your Goals Have Changed
Sometimes, “it’s not you, it’s me” really does apply. There are times when selling a perfectly good investment makes sense. If you’re rebalancing your portfolio to keep in line with your asset allocation you’ll be forced to sell off parts of your investments that have outperformed and caused you to own more than your chosen percentage of them. Other times your complete investing outlook may change, such as the need for your investments to provide more income rather than pure growth.
In either of these cases it’s important to sell in order to stay (or change) your investing course.
4. When The Herd Is Buying
Most investors follow the herd, buying when prices are rising and selling when prices fall. If you’re looking to take some profits on an investment you hold and don’t know when to do so, just go against the herd. You’re never going to time the tops and bottoms of markets perfectly, but if you need to take profits out of an investment a good time to do so is when everyone is bullish about the markets prospects.
I don’t like putting any money into the market that I’ll need within a 5 year timeframe, but things happen and sometimes you need to take money out of your investments.
Warren Buffett is famous for saying that his ideal holding time for an investment is forever. Unfortunately, s**t happens as they say, and we’re forced to part ways with our investments from time to time. The most important consideration to make before selling any of your investments is that your reasons for doing so are based on tangible evidence, not emotion. You put a lot of thought and consideration into the purchase of your investments. Make sure you put at least that much into the reasons for cutting the cord on an investment. Once you do conclude that it’s time to sell, do it and don’t look back. A clean break is best for all that are involved.
Readers: What other reasons would you add to the list of why you would sell an investment?