If you think choosing an investment is a challenge, that's nothing compared with the difficulty of deciding the right time to sell.
Let's say your stock, mutual fund, property, collectible (antique, stamp, precious stone, etc.) or other investment has gone down in value. Should you sell to avoid losing any more money? But maybe you should hold on to give it a chance to recover? Or good news: your investment has gone up in value.
Should you sell now to lock in your profits? Or hold on in case it goes higher? And if you sell (outside a tax shelter like an RRSP or RRIF), you'll probably have to pay transaction costs and capital gains tax.
It's more than just a simple investment decision. Feelings play a strong role here. Selling a loser suggests we made the wrong decision to buy that investment, and we don't like that feeling.
The no-brainer compromise: sell part of the investment and keep part (if the investment can be divided). Then if the value keeps dropping at least you got part of your money out; if the value picks up again at least you benefit from the part you kept.
If you are pessimistic or worried, sell more than half; if you are only a bit worried, sell less than half. If you don't know, go 50-50.
When you sell part or all of an investment you once again have money in hand to reinvest. See if there is a lesson to be learned from having chosen that investment and if so, apply that knowledge to your future investment decisions.
For example, perhaps you didn't fully understand the nature of the company whose stock you bought and the field(s) it operated in. Perhaps you weren't aware of the buy-sell pricing gap of a collectible - and therefore how much the item had to go up in value for you to make a profit.
Does this advice about selling go against the "buy and hold" strategy? No. You need to review your investments regularly to make sure they are still appropriate, then make a conscious decision whether to continue to hold or to sell.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
