The stock market had a tough time of it at the end of 2018. Despite a partial recovery the tech darlings that led market gains for years have investors worried. If you have ridden the bull market for gains over the last few years, is it time to consider some changes in your investment portfolio? For most investors, the question is whether the market will come back or not this year. But there are a number of reasons to consider getting out. So, when should you sell an investment? Here are some thoughts on the subject.
When Should You Sell an Investment?
The first question really is why did you invest in the first place? Yes, we invest to have more money. But, is there a specific reason besides simply wanting to have more? Please forgive us for stating the obvious, but here are ten reasons why we invest.
- Increase your wealth
- Saving for retirement
- Reach a financial goal
- Take advantage of employer matching 401(k) program
- Increase returns from pre-tax dollars
- Increase the rate of return on your money
- Start your own business
- Take care of family or contribute to a charity
- Reduce your taxable income
- Invest in and be part of a new business venture
The point is that when you should sell an investment will depend in part on why, and how, you invested in the first place. Here are a few examples.
No Longer a Good Investment
We have written about Kodak several times. George Eastman and his company invented camera film and the personal camera. They were the leader in the industry for a hundred years. Then digital cameras were invented and Kodak’s business plan no longer worked. When should you sell an investment when its business plan is obsolete? The answer is, sell it now. Do not try to time the market. Get out because the direction of the investment will be downhill until the end.
There are situations in investing that are obvious, like Kodak and, perhaps today, Sears as well. Sears was a pillar of the retail world for about as long as Kodak dominated the world of cameras. And, although online shopping has greatly hurt department stores, there are still retailers making a profit. But, Sears is not one of them. When should you sell an investment that is not keeping up with its peers? Again, the answer is, sell it now.
Learning to assess intrinsic stock value is essential for a long term investor. If your goal in investing is to increase wealth over the long term, you need investments that will reliably generate income over the years. These investments have intrinsic value in excess of their current price. When that is not the case and is not likely to be the case, over the long term, it is time to sell.
Market Too Volatile for Your Investment Time Frame
If you are investing with the goal of sending children to college or for the business you have always dreamed of, you may not have the luxury of waiting for each of your investments to ride out a recession and a down market. And, like most normal investors, you may not be all that successful at timing the market.
If the market starts getting volatile, like it did the last few months, when should you sell an investment? The answer is that you should sell at least part of your investment as soon as possible on the next up day in the market.
In fact, if you are nearing retirement, getting close to when you will need money for college, or close to what you need to start your new business, it will be wise to re-balance your portfolio to reduce risk from your most volatile investments. Part of such a portfolio should contain cash or its equivalents. We have written about how to invest without losing any money. In that article we note that the safest investments include US Treasuries but only if they are held to maturity. When the markets, interest rates, and other factors become volatile, use a ladder of short term bonds or treasuries to provide safe investments and ones that will not be swept up in the market volatility.
A Multipurpose Investment Portfolio
Even if you are putting away money to send the kids to college, you are, or should be, saving for retirement as well. Thus, when you should sell an investment will depend on the purpose for which you are investing each portion of your portfolio.
The mix of investments in a portfolio is typically more growth stocks early in the game and more value stocks and bonds later on. This mix can be modified for each portfolio segment so that when it comes time to sell investments and get ready to use one portion of the portfolio, the other portions remain untouched.
When Should You Sell an Investment before You Expected to?
US News published an article about when it’s time to sell a stock.
Other than cash flow needs, “The only reason you would sell would be when the future expectations are below your target.”
Thus, you are routinely doing fundamental analysis on your portfolio and the fundamentals have changed on one or more of your investments. This should be a routine chore over the long term. Or, the time has come to cash out an investment to start paying college tuition. When should you sell an investment outside of this time frame? It is when you cannot make an intelligent assessment because of market volatility. It may be the trade war, interest rates, or social and economic unrest offshore where you have foreign direct investments. It does not matter why it happens but when you cannot make an informed decision it is time to get out. This advice follows that of Warren Buffett who says he throws out 95% of his potential investments as too hard to call. Buffett, in fact, held a strong cash position going into the dot com crash because he said the market made no sense!