You’re probably familiar with the phrase ‘timing is everything’ and there are few places where this phrase holds more weight than in the world of investments. Whether you’re talking about stocks, bonds, real estate or shares in a Fortune 500 company there is always a right time and a wrong time to sell.
But how do you really know when that is? Here are some Pro Tips to help you decide.
Curb Your Enthusiasm
One of the greatest enemies of sound investment strategy is emotion. Giving in to your emotions can cause you to sell too quickly and lose out on a fortune or hold on too long and take a beating. As a real, live flesh-and-blood human being, you can’t actually avoid feeling emotion no matter how hard you try – and really, you wouldn’t want to.
What we call “emotions” are actually the work of neurotransmitters and hormones and you can’t shut them off. But you can be aware of them and the effect they have on you and act responsibly in spite of them. The sharpest and most savvy traders know that despite their best efforts, big deals are a rush and that rush creates adrenaline and adrenaline creates an emotional high that can make you do crazy things.
So, how do you keep your emotions from getting the better of you?
Do your homework. Trust your instincts before the heat of the moment and set your limits accordingly. If your research tells you the market is going to rise to a certain point, you set a limit at which you get out and you get out when that mark is reached. Period. You may lose some money in the long run by getting out too quickly or staying in a bit too long, but ultimately you will do far better over the long haul by making rational decisions based on research, rather than in the heat of the moment.
Fair Value Not Vanity Fair
There are certain human traits that are always going to affect how we engage in security and commodities markets. One of these is that we generally have a tendency to overvalue what is ours and undervalue what is someone else’s. This also means we can be a skinflint when buying but expect others to jump high when we are the ones selling.
If you bought a security that was undervalued at the time you bought it and it has now risen above fair value, it might be time to sell. Do not let vanity get in the way. We all want to make that killer deal where we bought something for a song and sold it for a fortune. Sometimes that happens, but not often. More often, we buy at a discount and sell for a modest profit.
Do your research and try to leave your ego out of it. Do your best to assess what the genuine market conditions are and if your security has genuinely risen above fair market value, it might be a good time to sell before the market corrects.
Fees Please
Always remember that there are almost always fees associated with any type of transaction, not to mention taxes, which are often the biggest fees of all. These must all be factored in when you are considering selling.
Some investment have relatively simple fixed price fees, but others (such as mutual funds) can come with a wide variety of associated fees. These can include early termination fees, management fees, percentages of profits and many more. Above all, however, the taxes will have the most significant impact. Consider using a professional tax calculator to help you sort it all out.
Before deciding to sell, make a list of all of the taxes and fees associated with doing so and add them up. Then ask yourself how this will affect your profit and overarching financial plan. Make sure you have clear answers to before making a decision.
Portfolio Balancing – A Real High Wire Act
A diversified portfolio is always the best for minimizing risk. If you become over-exposed in a certain sector and things to wrong in that sector, your entire portfolio will suffer. It’s a good idea to sell off investments in areas you are overexposed to rebalance your portfolio.
Exit Stage Left
Exit strategies are an important part of any sound investment plan. It’s always a good idea to set up a predetermined exit point in advance at which you want to take the money and run.
If your initial goal was to make enough profit to put your children through college and your portfolio has surpassed the initial target goal, it might be time to get out while you are ahead and can enjoy your profits.
Ultimately, however, it’s up to you. If you have surpassed your goals but the economy is booming, and your investment are pouring in profits, you might choose to hold on a bit longer. On the other hand, you might want to get out now and enjoy going out on a win before the tide turns.
Knowing when to sell an investment is not an exact science. There are a number of different factors to consider that will change from person to person. If you follow the above tips, however, you should be on the right path to making sound investment choices for yourself.
This article was originally published on the Voleo Blog and is written by Andrew Altman of SlickBucks.com.
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