When to sell an investment is just as important as when to buy an investment.
Remember you don’t make or lose anything when you buy an investment. You make a gain or loss when you sell.
Have you seen large rises in the value of your investment in the last year or so? Did you invest in the likes of Bitcoin or Tesla shares which have seen huge rises over the last year? Is now the time to sell and bank those gains?
Holding stocks and shares can be stressful, even when you are sitting on a large gain. Do you hold out for more or bank what you have?
Let’s look at a process you can go through to take the emotion out of when to sell an investment.
When to sell an investment and the reasons for selling
There are two main reasons you might sell an investment.
The first is because you want to make an adjustment to your portfolio. This could be because you want to bank some gains or it could be you want to increase or decrease the overall risk of your portfolio.
The second main reason to sell is because you need the money. This could mean you need the entire capital held in the investment for a large spend or you might need part of it to provide you with an income.
These are both valid reasons for selling.
One of the worst reasons for selling is when you sell after a short period of bad performance.
There will always be times when your particular investment goes down in price. Sometimes the company or fund you invest in does nothing wrong, but something comes along and impacts the whole country or sector. A great example of this has been the recent pandemic. Governments have basically forced businesses to close temporarily through no fault of their own.
Once the shock period ends your investment could recover and still provide good returns in the future.
So, providing you have done your due diligence and you still believe your investment is appropriate you need to hold on during periods of price falls and if you can, buy more.
Having said that you also don’t want to be holding onto something that looks like having very little chance of recovering. Perhaps it’s a company that offers a service that will no longer be required in the future. You should get out quick so you can start making your money work harder in something that has better prospects.
The easy strategy to always know when to sell an investment
First of all, it’s important to understand the difference between investing and speculating.
Speculating is when you buy something in the hope that you will make a large gain very quickly. Examples of this would be buying an individual stock or a cryptocurrency like Bitcoin.
This is not investing.
You’re speculating because this is a very high-risk tactic. It’s basically the same as gambling and you will probably win some and lose some. Remember every time you buy something there is a seller and therefore, they have calculated a different opinion on what is going to happen next. Do you think you will be right more times than not?
- Deciding your goals and objectives.
- Working out what you need to achieve those goals and objectives.
- Building a portfolio that can achieve this at a risk level you are comfortable with.
Investing is for the long term where you aim to buy and hold and let your portfolio do its thing.
We would always advocate funds over individual stocks when it comes to investing so that you have that diversification which will lower your overall risk.
There is nothing wrong with buying individual stocks or assets as long as you know it’s speculating.
But buying a diversified portfolio of funds doesn’t mean you never sell.
There could be times when it is definitely right to sell out of a fund, perhaps:
- The cost has increased to an unacceptable level.
- The fund manager has changed.
- The fund has changed its strategy.
- The fund has underperformed its benchmark without good reason.
A good strategy will also involve tweaking your portfolio over time, so it stays within the volatility level you are comfortable with. This is known as re-balancing.
The beauty of re-balancing is that it forces you to sell some of the assets that have gone up in price and buy the assets that have fallen in price, e.g. banking gains and buying cheap.
How often should you re-balance your portfolio?
The traditional timing is to do this at least once a year with some Financial Advisers recommending half yearly or even quarterly.
Our investment team have researched this and looked at the evidence and found that the most efficient way to re-balance your portfolio and ultimately grow your wealth is to do it when your portfolio is 10% away from target.
Here’s an example:
If you start off with 60% of your portfolio in growth assets (e.g. stocks) and 40% in defensive assets (e.g. bonds) then if your growth assets grew and formed 70% of your portfolio you would sell some to bring that figure back down to 60%.
It doesn’t matter if this took, a year, 3 years or even 3 months you just track the data and do it when there is a 10% difference.
The same should also be done when looking at your individual holdings. If your target is to hold 5% of your portfolio in fund A and then over time fund A forms 15% of your portfolio. You sell some to get fund A back down to 5% and re-balance into the other funds in portfolio.
A final point of when to sell an investment.
Before selling you also need to be clear on the costs of selling.
- How much will it actually cost you to sell? Does the platform charge a fee for trading? Do this too many times and the trading costs could add up.
- Will you pay Capital Gains Tax on the sale? If your investment is held outside of a wrapper like an ISA or pension then any gains you make could be subject to Capital Gains Tax if over your annual allowance.
Don’t gamble with your investment strategy. Have a plan and keep it simple.
We recently did a webinar on the Two Techniques That Will Increase Your Pension Value And Boost Your Retirement Income. You can watch a recording of this below and if you still have more questions or need help getting your retirement sorted then please contact us for a free no obligation chat.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.