Understanding The Right Time to Sell Your Investments

Knowing when to sell your investments isn’t easy, but it is the key to making consistent profits in the financial markets.

You have probably heard the saying ‘Timing is everything’ before, and nowhere is that truer than in the world of investing. No matter whether you’re asking ‘Should I sell my investment property?’ or ‘Should I sell my shares in company X?’, the aim of the game is the same – to sell when the market has reached its peak, and get ready to use that profit to buy another asset which is approaching bottom.

But how do you know when to sell and when to hold on? Let’s explore some of the popular tips to decide when to sell investments.

When to Selling Investments – Follow These Tips

• First, Ditch the Emotion

The biggest enemy of sounds investment decisions, whether buying or selling, is human emotion.

It’s human emotion that keeps the gambler sitting in front of the slot machine, hoping the next spin will be the one that makes him a millionaire. The exact same emotion is at play in investing – it is human nature to not want to walk away and admit a loss. The deeper in we get, the harder it is to walk away.

Yet that can be deadly and many investors have found out the hard way that hoping a ship is not sinking does not mean it isn’t. If you have crunched the numbers, done your fundamental research, and realized a market or asset is spiraling downwards in a bear market, you have to find the resolve to cut your losses and walk away.

Nobody likes to admit defeat, but sometimes when trading you have to ask yourself whether you want to take a little pain now, or a lot later.

The reverse is also true in boom markets, when investors get carried away in giddy, gleeful, greed, believing that markets can continue on an upward trajectory forever.

They can’t, and as 2007/2008 showed, when they come down, they can do so with a bang.

Again, you have to look rationally at the market, the security you are trading and other economic factors, and realize when a good run is nearing its end.

The numbers don’t lie, but human emotions do. Remember that when thinking about whether to sell an investment.

• Understand Fair Value and Accept It

There are many different ways to evaluate a stock, commodity, or property. Supply and demand is certainly a key factor, but there are other factors to consider as well.

If you have bought a security believing it is undervalued, and it has risen above the price you initially thought it was worth, it is time to consider selling.

Of course, things may have changed and the security in question could now be genuinely worth more than when you conducted your initial analysis. You will probably have to do fresh due diligence based on current conditions, but when you do, accept what you find and do not let wishful thinking get the better of you.

If you find the security has risen above fair value – sell. It is only a matter of time before a correction happens, so consider yourself lucky to break out at or above the true price.

Likewise, beware of investments you hold which haven’t responded negatively to poor outlook, selloffs, and weak economic data. If you are holding something that has resisted a downturn, get the most up to date data you can find and run the numbers again.

• Don’t Forget to Factor in Fees

Before you sell an investment, you will need to consider the fees associated with doing so and how these will affect your total profit.

Some investments have relatively simple fees such as a fixed price, whereas others, such as mutual funds, can have all kinds of fees like management fees, early terminations fees, percentages of profits, and more.

Before you sell anything, make a list of all the fees associated with selling and tally them up. How will this affect your profits and how does this fit into your overall financial plan? Ask yourself these things and get clear answers before you make a decision.

When considering fees, never forget taxes. This can be the biggest fee of all! Consider using a professional level tax calculator to do the hard work for you.

• Consider the Overall Balance of Your Portfolio

Even if things are going well and your portfolio is producing solid returns, you need to periodically assess the balance of securities it consists of.

If you have become over-exposed to a certain sector of the economy, your risk naturally increases, since if things go wrong in that sector, your portfolio will suffer.

Diversification is good investment sense. If you are thinking of selling because you have noticed your portfolio is overexposed to a certain industry or sector, this is usually a very good idea.

Better to be proactive than reactive. Re-balancing is definitely a good reason to sell.

• Evaluate Your Own Personal Goals

Part of any sound financial plan is an exit strategy – a predetermined exit point at which you have made a certain amount of money, and want to take those profits and buy a new car, a home, or retire.

Goals naturally change as life unfolds, so before you sell your investments, ask yourself whether your targets have been met. If you set out to make enough to put your children through college and your portfolio has surpassed the number you initially wanted, it could be a good time to get out while you are ahead.

This is something you alone will have to decide. If things are going great, the economy is booming, and the companies you have invested in are roaring towards greater success, you might decide to hold on past the point at which your targets have been reached.

On the other hand, you might decide to get out before things change and enjoy that early retirement, new car, or seeing your kids flourish in college.

Summary

There is no exact science behind when to sell an investment.

As you can see, there are many factors to consider – some purely mathematical and economic, and some personal.

The answer as to when to sell stocks, commodities, and other investments will be unique for each person.

Should you get out while you’re ahead or hang on and reap further returns? If you follow the above tips, you will be on the right road to making better investment decisions, including when to sell.