Knowing when to sell your investments may be the hardest decision to make. In fact, knowing when to sell can be tougher than knowing when to buy. There are many factors you must take into consideration when selling your investments. You will have to figure out whether or not you think the investment has growth potential, or if the investment is in a bubble, or if it can recover from its current decline. Without knowing when to sell you can either loose more than you expected or minimize your profit margins.
Here are good reasons to sell your investments:
Change in Fundamentals
Before buying any investment, most people look at the fundamentals: balance sheet, income statement, cash flow statement, and etc. When you buy an investment and you are thinking to sell it, you must look at the same metrics or reasons you bought the investment initially. The common metrics you will want to look at are:
Check the net gain in income that a company has over time. Look for growing earnings and compare it with other competitors in the same industry. Also, take a look at the analyst expectations for their future earnings.
Every company is going to have periods where the stock loses value. Find out the reasons for the loss of value. Some common reasons may be economic related. However, if you see consistent fluctuation even in good economic times, then that could be a red flag!
Relative Strength in Industry
Take a look at the company’s industry overall. Does the industry show potential growth in future? If so, look at the company and see what role it plays in the industry. Does it have a big role? Can it eliminate the competition? Are there barriers for new companies entering in the same market/industry?
Debt to Equity Ratio
Almost all companies carry debt on their balance sheet. It would be more favorable if you found a company with a 0.5:1 debt ratio (Warren Buffet usually uses this metric).
If your investment is suddenly seeing a great deal of growth relative to similar investments in a short period of time, it could be a warning sign that a pullback could be in the near future. You can also see this in dividend stocks that have much higher yields than other dividend paying stocks, or in a foreign government bond whose yield suddenly heads higher than similar countries yields.
No Longer Fits Your Goals
Before buying any investment you usually create a “game plan” or a “goal” that you want to achieve. Some of these goals may be short term or it may be long term. Overall, you want to evaluate your investments based on the goals you have set. If you have set out to have a 20% return on investment (ROI) and you receive 15%, find out why and if it is possible to gain the 20% ROI. However, if you lost 20% of your investments and your game plan is to sell either above or below 20%, then SELL IT! DO NOT WAIT AND HOPE FOR YOUR INVESTMENT TO INCREASE! That is a very common mistake that many people make. Be disciplined with your investments!
In conclusion, take the time to evaluate your investments. Look for investments that you might have a good reason to sell, and get rid of them. Do not wait for Christmas, Diwali, or your friend’s birthday to sell your investment. Remember that you sell to either cut your losses or hedge against a bubble bursting. Stay tuned for more!
Daniel Sharma is a contributor to Youthful Investor. You can check out his trades and guides to investing at his blog Spiked Finance.