When should you sell?

22 May 2013

By Shadforth Financial Group

Making the decision to 'sell' something is just as hard as it is to make the decision to buy an asset. Most of the advice which you will receive revolves around purchasing a particular investment but very little advice is given on when to sell an investment.

Before you sell any investment there are a multitude of factors to consider including the costs involved in the sale, the tax implications and your particular circumstances. As a general rule it is worth remembering that assets (or money) are like soap, the more you touch them the less you have. However sometimes you also need to know when to sell.

Many investors fall in love with an investment and it works to their advantage, such as those who purchased bank shares in the early 1990s, but there are others where the opposite result occurred, such as those who purchased Telstra at $9 in the late 1990s. The winners regard this as prudent investing but to be frank some people were lucky and others were unlucky.

With this in mind there are a number of factors that may trigger the decision to sell an investment including:

1. Adverse regulatory changes

Where the government enacts laws that make it more difficult for a business or asset to operate this is likely to impact the future profits of that investment and the value will likely fall. Imagine the impact on property prices if the government removed negative gearing (they would fall) or removed capital gains tax on property investments (they would rise).

2. Industry changes

The world is changing and to remain relevant businesses need to embrace change. Unfortunately the corporate world is littered with examples of those that didn't, including Kodak, bookshops and many video rental businesses. Nothing stays the same forever and technology can very quickly erode any economic advantage a business once enjoyed, just ask the owner of a newspaper.

3. Deteriorating financial conditions and yield

Where the financial position of an investment is falling this is a major red flag. With listed investments those looking for a sustainable yield need to pay particular attention to sales, earnings, expenses and cash flow. Whenever a business is in trouble the yield is one of the first casualties.

We saw this with many of the unlisted property trusts during the GFC when many froze the funds and ceased paying dividends.

4. The need to re-balance your investment portfolio

Reweighting or rebalancing your investment portfolio regularly is a disciplined way of ensuring that you reduce the overall risk to your financial assets. The expression 'don't have all your eggs in the one basket' is as true today as it has ever been.

A final word

Making the decision to sell is an important part of the investment process. While some people are lucky, others are not, but making the decision to review your investments is an important first step in the process.

Good luck!

If you like this article, please feel free to share it with your family and friends.

Educational guides