Should I Sell My Investments?
Knowing when to sell your investments can be a difficult decision. In this article, I look at why having your own investment strategy in place is important. I also look at 3 common things you may be thinking of doing when you have sold your investments.
What is An Investment Strategy?
An investment strategy is a plan. It should be in writing, detailing among other things the reason why you are investing. It will also answer questions you may ask yourself in times of stress. ‘When Should I Sell My Investments’ could be one of the questions you will have answered in your plan.
The advantage of having a plan is that you will have more time to think through potential solutions. You will weigh up each one and arrive at an answer which is correct for you. It also helps you manage the natural biases we all have. Ok, you may be saying that is useful for next time. I have not done this for my existing investments.
Whilst it is best to have the investment plan in place before you make any investments, you can put one in place at any time. For more information on putting an investment plan in place, please contact me.
Let’s now consider selling your investment…
What Would You Do With The Money?
Before you sell your investment, you need to consider what you will do with the proceeds. Here are some thoughts you may be having for the sale proceeds…
1. Repay Debt
There are two types of debt: good debt and bad debt.
Good debt is the type that you use to buy assets which increase in value over time. An example is a loan to buy a house. Whilst the amount borrowed is high the interest rate is low. Most of us would never be able to buy a property if it were not for this type of lending.
Bad debt is spent on supporting a standard of living higher than we can afford. Or on buying assets which fall in value over time. A lot of credit card spending which is not repaid every month falls under this heading. Credit cards often express their interest rates in per cent per month for example 2.2% per month. This may appear a small amount. In reality, it is 30% per annum. No investor will achieve this level of return consistently. Therefore, repayment of this type of debt is usually a priority before you start investing. If you have racked up credit card debt since you have been investing, review your budget to see what has caused this.
2. Keep It in The Bank
If you have recently seen the value of your investments go up and down unexpectedly, it is tempting to just put the money in the bank. At least it will be safe there, right?
Well, that depends. Certainly, in the short term, the nominal (the face value) of the money will not change. You put US$1,000 in the bank today and you know your bank statement will say US$1,000 tomorrow. That’s fine in the short term but your goals are over the long term. Perhaps 10,20 or 30 years. During this time, the impact of inflation will reduce the purchasing power of your cash. That is the goods and services you can buy will be less when money is left in cash over the long term. Interest helps combat this effect but with inflation running at over 2% and interest rates at less than 1% in most parts of the world the real rate of return is -1% or worse.
This may not seem like a lot but over the long term, the impact is serious. For example, if the real rate of return is -1% over 20 years the purchasing power of $10,000 will fall by over 18%. Investing in real assets like shares and property can result in short term fluctuations in value but over the long term provide better protection against inflation.
3. Invest it elsewhere
If your money is already invested, you will have incurred the costs associated with investing the money. If you sell the investment, you may incur further costs. When investing into a new investment you will incur more costs. Therefore, it is important to know what these costs will be before you sell and buy something new.
In some cases, this may result in a saving over time as newer products and services offer lower costs and more flexible terms. A good financial planner will explain the charges to you, do the calculations and help you decide what is the best option.
One of the trickiest elements to avoid is a natural tendency to try and time the reinvestment of the money to our best advantage. In multiple studies, it has been shown that attempts to achieve this are heavily weighted against those attempting to time the markets. This is because when the investor came out of the market it had already gone down. Once the markets turn and the investor has noticed, they miss out on that early surge. This leaves them behind those who remained invested throughout the turbulence. Therefore, when selling investments with a view to reinvesting in lower charging or better-suited products, it is important to do so quickly. For more information on investing as an expat see this article.
Summary of When to Sell Investments
Selling can make sense if there has been a change in your circumstances such as retirement. Or there are better options available. Whenever you decide to sell and reinvest, it is important to know the changes associated with the whole process before you act. Only then will you be able to see if the switch is really in your interests.
If you are thinking of selling your investments and considering an alternative,
book a call with me by clicking this link,
or complete our contact me form; or
call 050 594 5217 for a free, no-obligation review of the options.