It is really normal to be nervous or afraid for the future when the price of your investment drops quickly. But should you sell?
Markets rise and fall daily which is why we always suggest a long-term investment strategy is key to ride out market volatility. The length of time in which you choose to invest should align with your goals and objectives for investing in the first place but what about pulling out of an investment? How do you know when is the right time and the safest time to do so?
The perfect time to pull out of an investment will be different for everyone much like deciding when to sell a home. You need to take into consideration the timeliness of your goals and take into consideration the current market performance. You may have invested with the goal to use the funds towards your retirement plan or to buy a business or property within the next years.
So if you are worried about one of your investments now and are contemplating selling it, here are some things to consider:
What was the investment for? Is it part of a strategy?
If your investment was made with rich information and qualified advice, as part of a strategy, it is likely best to stick to that strategy and timeframe if you can. Of course, life happens and personal circumstances change, so if that is the case, you may need to adjust your strategy. Keep in mind, however, that investing is usually a longer-term plan and that ups and downs are a completely normal part of the journey.
Read our market update on why super and growth assets like shares have to be seen as long-term investments.
If you are a ‘DIY’ investor, it may be worth running your strategy and investments past on an informed third party. It can be difficult to separate our emotion-based decision making from our investment choices and a third party or adviser can help shine lights on gaps or unnecessary risk.
Why do you want to sell?
Human psychology tells us that we tend to want to buy when markets are strong (high) because there is a lot of validation that it is a good time, confidence is high and others are buying in. It also tells us that we tend to want to sell when markets are week (low) because that is what others are doing. Values are dropping and we become afraid of what might happen and want to get out before it gets any worse. That market timing is not usually a good reason to sell. Statistics show time and time again that those who stay in the market consistently over time do better than those who jump in and out trying to time things.
If, however, there are underlying reasons to question your investment you may want to sell. Perhaps there has been a fundamental change that determines the future performance of that asset is unlikely to recover. Or perhaps you need to liquidate to fund another part of your life. There are many reasons to sell, just make sure you are making an informed decision, not an emotional one.
Does it play a role in diversifying your investment portfolio?
For most people, particularly when they work with an adviser, when investment portfolios are established, they are done so with the concept of diversification in mind. That means exposing you to a number of different asset types and classes. We do this so that when one asset class is impacted by an event, other asset classes are likely to stabilise losses too much. The old’ eggs in one basket’ concept – by spreading your investment around, you are reducing the risk of loss. If you are considering selling off, ensure you are not putting your portfolio too far out of balance.
What is the future prospect of investment?
If we look at the current market, April 2020, many assets are priced lower today than they were a couple of months ago, but their underlying values have not actually changed all that much. While we go through a phase with will end at some point, asset prices are likely to remain low or volatile, but also likely to rebound. If the underlying value of the asset has not changed, as in, once things rebound it is likely to recover, then selling now may not be a good idea. If, however, the quality of the business has declined, or the market price is well above the intrinsic value of the asset, it may be the right time to sell.
Read our market update on the coronavirus pandemic and the economy – a q&a from an investment perspective.
How easy is to sell?
If you have direct shares, it is usually relatively easy to sell. If you are considering the sale of a property, that will take time – months or longer! Other investments may also have complications that need to be managed and planned out to sell. If you are considering a sale, ensure you understand the process and make plans for that.
Get in touch with us today to discuss your investment options.
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What you need to know
This information is provided by Invest Blue Limited (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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