I get this question a lot and no, there isn’t a one-size-fits-all answer. It really depends on the type of investor that you are, the risk tolerance that you have, and the objective of the investment. Regarding types of investors, a day trader will have parameters for selling investments that are much different than someone putting away 10% of their paycheck to their 401k account, or what we call a long-term investor. Most people are long-term investors but they can be influenced to act like short-term traders due to the constant flow of information with our 24 hour news cycle.
What is even more confusing to most investors is that most financial media outlets, such as CNBC, Bloomberg, etc., tout information that is mostly geared towards short term traders. They rarely mention this and many viewers wrongly interpret what they hear as what they should be doing. For example, if I’m retiring in 10 years, should I really care what the employment numbers are for last month? Of course not, but some business shows will make you think that it will be the end of days if the number is not what they expect.
So, instead of getting pushed and pulled by talking heads every day, here are a few things to consider when evaluating whether or not to sell an investment:
- Are the reasons that I bought it still valid? Remember Blockbuster Video? They ruled the movie rental market until Netflix came along and changed the industry. Any Blockbuster investors would have saw that there reasons for owning that stock were no longer valid and hopefully sold.
- Are there other opportunities that provide a chance for a higher return? The Blockbuster scenario above can be used here as well but I like to ask this when an investment has already lost value. Many investors will hold onto an investment that has lost value until it recovers to the price that they bought it at before selling it. That’s emotional investing which is rarely a good strategy. Remember, you don’t have to make your money back the same place where you lost it. If there are better opportunities, go ahead and cut bait and move on.
- Has the return on investment met your expectations? If it has, who says that you have to sell it all? Well, you could be a great market timer and get out at the top but most likely you will have seller’s remorse when the price continues to go up. Not to worry. Simply sell a portion and set a higher goal for the next sell point.
The takeaway from this short blog is to have a standardized method to evaluate your investments periodically to determine if they still should play a part in your investment portfolio.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
