When it comes to investing there will always be a time when you’ll have to make the decision to sell. Knowing when to sell is claimed to be this magical power that only some of the best investors have. I disagree.
In 2009 stocks were in the gutter. Chase and Bank of America and Ford were nearly among single-digit stocks at the time. I bought some, panicked, and sold them. In fact, I loved in a beautiful $6,500 loss because the market wasn’t done dipping down.
Why Did You Buy?
When I bought those bank and automotive stocks I bought them because they were priced really low. I had no idea what their valuation was. I didn’t even know how to do a proper valuation assessment.
If someone asked me why I bought stock xyz I would have given an answer that wouldn’t have been satisfactory. And here is why – if you don’t know why you bought you won’t know when to sell.
I bought my condo in Portland because I wanted something really cheap as a base in the US. I then bought a condo in Spain because it was yet another cheap base in Europe.
Whether my condo in Portland goes up or down (it’s down a lot) or my Spain condo goes up (it’s up by a bit) is less important. The reason is that I had a proper reason for buying these assets.
Buying With an Investment Plan
To know when to sell a stock or asset you have to be able to look back on your investment plan. This is a little contract your write for yourself when you first start investing. It tells you what you should or shouldn’t do based on the knowledge you have at that time.
If I buy an automotive stock with an investment plan I’ll likely have some 10-year outlook where I’ll hold on to the fund as long as its future valuation is good.
Or, getting away from stocks and using index funds as an example, I’ll hold on to a broad stock index fund as long as I believe there is a future in that asset class.
Selling When High
I am tempted all of the time to sell my assets when they have doubled or gone up meaningfully. But what would I do with that money? I’d have to look for another investment unless maybe I want to renovate my home or use that money for travel expenses.
The good thing about having multiple asset class investment ideas – for me it’s real estate, P2P lending, stocks, bonds, crypto, private businesses, etc. – is that you can change out of one into another.
So I can sell a stock or asset class when it’s high and use that money to invest in something new. Maybe it’s crypto because you think that’s a better asset over the next 10 years than your mutual fund.
Buying When Low
The opposite should be true then, I should buy more of a fund if I think it’s a good investment. If it jives well with my overall investment strategy and the valuations make sense then I should buy more of it even if it dips down.
Yet, every time stocks are down my friends send me sad faces because their retirement portfolios are down. As I’m writing this we are having one of those moments in stock history.
Crypto is down and though I don’t invest in Crypto in order to profit from its appreciation I like to put more money into it when the asset goes on sale.
Selling Based on Valuation
Maybe an individual stock or asset class is overvalued and I see it eventually leveling out or crashing. That might be a good time to sell.
But what’s my investment strategy? I keep coming back to this point because if I don’t need the money from this asset and even if it’s valuation seems bloated, as long as I think it’s still a good investment it’s probably worth holding.
What if it was very clear that fossil fuels were going to be obsolete in the next 20 years. Okay, that’s the perfect time to sell. Knowing when to sell here comes from the fact that this asset class is no longer viable in the future.
Better Use for the Money
Finally, I might sell because I have something better to do with the money. I kind of mentioned that above: I want to buy a new car, renovate my home, or cash out to enjoy my retirement.
All of these and many more might be good reasons to sell a stock. But I would prefer to dip into a cash savings account or get a loan for these things.
I prefer a loan because I can always delay payments on a loan or refinance it. Yes, maybe with some penalties but my investments all are tucked in nicely and I prefer to not disturb them except for using the money to enjoy my retirement.
I’ve sold and profited before and I’ve sold assets and regretted it. The only way you are going to be a better investor is to experiment and practice.
Go sell something in your portfolio especially if you’re the type too afraid to ever tough your investments. Nothing will happen, I promise.
Sell it, make note of it for taxes, and spend it. Or buy another asset with it. Whatever just get the practice under your belt.