Recently I was asked, "you invest right? When do you usually sell your investment? Some of my investments are going up but I don't know when to let them go."
I bet this is a common issue many people encounter when investing! We learn how to identify good investments and evaluate risk but very few literature actually teach us when do we let go of our investments.
Even more recently, my mom told me (knowing I hold some DBS stocks), "DBS is now $28. You better sell it before it goes down again and you need to wait another cycle."
Many laypeople who invests, myself included (at one point), often feel that we need to sell our investments in order to realise our gains. If not, we didn't actually make money. Sometimes, our investments go in circles. They go up, didn't sell, then they go down and we seem to hold on for ages making the same amount of money.
How then should we be investing to grow our pot of gold so that we have more resources for our wants, our retirement and potentially even buy a number of big ticket aspirational items like a house and a car?
How investments work?
Investments fundamentally make us money when we buy low and sell high. Hence, if we make a purchase at a certain price, we make money if we can sell it at a higher price. In a bullish market where prices are going higher and higher, if we buy high, we simply need to sell higher to make money.
Everybody know this. However...
In the long run, most major markets go up. Refer to this article: How Come We Are Always Told That We Should Invest Long Term if you need evidence of historical trends of major markets. The part that disrupts our investment psyche happens when markets correct on its way up.
When we zoom in, it looks something like this.
Then we start to wonder if we should sell our investments before it drops further.
However, it may simply be a small dip in the over-arching long term picture.
In such an instance, selling your investment might mean missing out on a multi-bagger and potentially earning a small gain.
Hence, most of my investments are held for years and would not be sold without a good reason.
Which leads to the question, when do I sell my investments?
1. When the investment philosophy is no longer relevant
The first reason is perhaps the most widely advocated reason to sell your investment. Famous wealthy people like Bill Gates, Warren Buffet and even Tom and David Gardner of Motley Fool advocate this.
What this basically means is that we all make investment decisions based on certain reasons. It might be we decide to invest in a company or a sector because it is undervalued. It might be because of our belief that the direction of the sector has certain advantages for instance, we might hold a technology related fund because we believe that the gig economy coupled with a strong reliance on more and more technological advancement will benefit the sector for the coming 10 to 20 years. Hence we made an investment. Are we going to sell the investment because there's a sudden tech sell-off caused by inflated valuations and profit taking? Unlikely because the fundamental premise that we believe the future lies in greater dependency in Technology still holds true. Hence, if this is the reason why I invested, I'll still hold on to my investment because markets move in zig zag. Corrections are bound to happen before prices move higher, so I'll stay unaffected by market noise that will result in constant volatility in price.
Of course, this is an overly simplified example. But you get the idea...
As long as the original premise I decided to invest stays true, I'll stick to my investment. However, if the premise of my investment no longer applies, even if I'm losing money, I won't have emotional attachment to my purchase and simply cut losses and take it as a wrong hypothesis.
2. I intend to spend the money
We invest to give us more resources to empower us to live our ideal lives and realise certain aspirations. Investing or saving money isn't about having a bigger and bigger balance which we don't intend to spend and feeling proud that we will be the richest person in the cemetery.
Given that I invest most of my funds except my emergency funds, I need to liquidate some of my investments whenever I want to make big purchases. It can be for housing, for my down payment of my car or simply because I want to go for a more expensive holiday.
The idea of not liquidating the investments when I don't need it is because the returns on my investments are much higher than the interest I get in the bank. So it makes little sense if I liquidate my eg 10%p.a. investment to let the money earn 0.05%. If my returns are higher (as of now they are), then my opportunity cost is simply higher. Hence, I'll only liquidate my investments if I need an amount of funds which my surplus money in my bank balance isn't sufficient.
Obviously, money management makes a difference whether one has more or less money. If you liquidate your investments for every nitty gritty purchase because you simply love spending more than you earn... you will likely need to liquidate all your investments.
This rarely happens in my case.
3. When I wish to adjust my risk exposure
Another occasion I liquidate my investments is when I wish to redirect my funds from higher risk instruments to lower risk instruments. It might be taking off some of the profits because investing still has an element of uncertainty and channelling them to more predictable asset classes like endowments which is principal guaranteed. Of course, when I do this, I don't expect my returns to remain high.
I get it very often that clients complain to me that endowment returns are low. In my opinion, endowments are rarely my choice of wealth accumulation tool. It's my choice of wealth preservation tool. When I channel my funds into such instruments, my objective is simply to meet inflation and ensure my capital stays intact.
Do I channel all my profits to endowments? At my age, no. I might even channel some of my profits to even higher risk instruments like cryptocurrency. In this case, it might be adjusting my risk exposure to one that is higher.
What might trigger such a change? Maybe a higher income or greater confidence in my investing skills given that I've more experience...
This of course varies based on different life stages and commitments.
How has this approach benefitted my overall portfolio?
Personally, I've attempted both a buy-sell-buy-sell approach earlier in my career and also a buy and hold approach later in my career. Buy and hold works a lot better for me.
Besides saving me a lot of time, it also enabled me to earn many multi-baggers bringing my portfolio returns up exponentially. Often, when I was 'trading' my investments, I would often miss out on opportunities or sell too soon because when I got busy, I might not be able to monitor my investments effectively due to the time sensitive nature of speculation.
I am less likely to be guilty of selling my investment too soon now and have given time for my investments to fulfill their potential and actualize the premise why I invested in them in the first place.
Summary
Keeping this entry short, I'll strongly suggest investing over speculating especially if you are a retail investor. This means a buy and hold approach.
In my case, I'll only liquidate my investments under these 3 occasions:
When the investment premise is no longer relevant
When I intend to use the money
When I wish to re-adjust my risk allocation
Always remember time in the market is better than timing the market. Stay unemotional through out your investing journey!
After reading this article, you may have some questions or wish to be hand-held through your investing journey. You can reach me by dropping me a message.
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About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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