Know When to Sell

The key to successful investing is not only to buy the right investment at the right time, but to sell at the right time. There are two factors that determine when you should sell – firstly, your investment time frame and secondly the expected future return from the investment. Many investors make the mistake of retaining investments for either too long or too short a period, and receive a lesser return or a greater loss as a result.

There are a number of reasons why people own investments for too long. In some cases, the investment is one that has performed extremely well and this leads to an expectation that the investment will continue to perform as well in the future. The usual scenario is that future performance declines, or even becomes negative, and the investment is eventually sold at a discount. On the other hand, if an investment makes an initial loss, an investor may decide to persevere with it until such time as its value is at least restored. This is not necessarily the right thing to do. Selling an investment too early can come about when the investment has a marked change in performance – either rising or falling sharply in value in a short period of time. The investment is sold when the investor is in a state of either panic or euphoria.

So how do you know when is the best time to sell? You first need to decide how long you wish to have your money invested for or how long you willing to wait to get the best return over the investment period. If you are a speculator, this could be weeks or months, while a long term investor may be looking at getting a good average return over a ten year period. Next, check the current market value of your investment and consider what you expect the future return on the investment to be over your investment period. You might need to do some research on the overall market and the specific investment in order to reach an opinion on this. You will also need to consider the probability of getting that return, or close to it. Some investments are riskier than others, and that means there may be a wide range between the lowest and highest returns you could expect. The final step is the most important one, and usually the one that is overlooked. If you were to sell your investment now at current market value, what other investment alternatives do you have and what is their expected return over your investment time frame? This is what will determine whether you should retain or sell. The important point to note is that the original price you paid for the investment does not feature at all in the decision making process.

Let’s look at a simple example. You purchased a five year bond one year ago for $20,000 with an interest rate of 10%. The bond has a current market value of $18,000, but because the bond issuer is in financial trouble there is a high probability that you will only get back $10,000 of your capital when it is due to mature. You can choose to keep the bond, and hope that you will continue to receive the interest and capital, or alternatively, you can sell now at a capital loss and invest your $18,000 in an A grade investment for four years at 8%. You don’t need to do the mathematical calculations to work out which is the best option.

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