Sometimes, selling is the answer.
Trying to figure out the right time to get in or out of an investment can be tricky. You don't want to try to time the market, but you don't want to be stuck, either. Selling an investment when you're panicked is almost never a good choice. However, there are some other good reasons to unload an asset. Here are seven indications that it might be time to sell an investment.
The asset no longer meets your portfolio needs.
Whenever you add an asset to your portfolio, it's important to understand the role it plays. Think about where the investment fits in with your short- and long-term goals. At some point, the asset might no longer meet the needs of your portfolio. When that happens, it's time to sell your investment and use the proceeds to buy something that better meets your needs.
The investment is no longer undervalued.
If you got a great deal on an asset, the right time to sell might be when the investment is now worth enough that everyone wants in on it. Value investors regularly look for assets that aren't properly valued at the time. Then, they hold them until the market begins to recognize their value. When your asset has appreciated to the point that it is might even be overvalued, selling can be a good way to realize profits. Once you've locked in your profits, you can look for another undervalued investment to buy. With this process, you can continue buying low and selling high.
Cash flow problems are emerging.
One indicator that there might be problems is cash flow. When you're investing in a company, cash flow problems can be a sign that things are going the wrong way. With real estate investing, negative cash flow can be a sign that the property is going to cost more than it's worth to maintain. Carefully consider cash flow issues, no matter the asset class. If cash flow is a problem, that's a good sign it's time to sell an investment. To reduce your exposure to the revenue issues, take the capital and then reinvest it in something with positive cash flow.
It's time to rebalance your portfolio.
Take a look at your asset allocation. Is it out of whack for your goals and where you're at with your portfolio? When this happens, it's often a good idea to sell investments in the asset class that's doing well and use the proceeds to buy lower-priced investments in another asset class. In general, you should only rebalance your portfolio once or twice a year. As you review your portfolio at these times, you can see where you might need to bring things into balance to make sure you maintain your desired level of returns.
The fundamentals change.
Fundamental analysis allows you to take a look at the underlying essentials of an investment. If you only make choices based on price drops or what the stock market is doing, you could end up selling at the wrong time. Instead, look at the fundamentals of an investment. Look at your price-earnings ratio or consider the balance sheet. Additionally, pay attention to what's happening with management. Big changes to how a fund, company or property develop can all make a difference in the outcome. If you're afraid that the fundamentals of an asset have been compromised, it might be time to sell, take the proceeds and invest them in an investment that has better fundamentals.
You want to harvest losses.
Sometimes, selling is about taking the loss. Tax-loss harvesting allows you to sell an investment for less and then offset your capital gains or even your regular income using the loss. This strategy can allow you to limit the downside associated with selling for less. When deciding which assets to sell at a loss, it can make sense to combine this step with other signs that it's time to sell an investment. For example, you might choose to sell an asset that no longer fits into your portfolio. You get a tax benefit from selling at a loss and you can buy something else that works better in your portfolio.
You made a mistake.
If you realize you made a mistake buying an asset, either because it doesn't meet your portfolio needs or because you misjudged some aspect, it might make sense to sell the investment and be done with it. In some cases, you might even sell at a loss. Whatever you do, don't hang on just because you've already spent the money. The sooner you rectify the mistake, the less likely you are to compound the problem. However, anytime you sell anything in your portfolio, it's important to analyze the situation. Figure out the reason it makes sense to sell and be sure that selling the investment will actually move you closer to your finance goals.
Signs it's time to sell an investment.
-- The asset no longer meets your portfolio needs.
-- The investment is no longer undervalued.
-- Cash flow problems are emerging.
-- It's time to rebalance your portfolio.
-- The fundamentals change.
-- You want to harvest losses.
-- You made a mistake.
Miranda Marquit has more than a decade of experience covering financial markets, investing, business, and personal finance topics. She has made contributions to a wide variety of media outlets, including Forbes, NPR, FOX Business, Entrepreneur, Yahoo! Finance, USA Today, Investopedia, The Balance, and MSN Money, in addition to U.S. News & World Report. Miranda has a master's degree in journalism from Syracuse University and is working on her MBA. She also writes about personal finance and investing for her blog "Planting Money Seeds" and contributes to the successful Money Tree Investing Podcast. When not writing about money, Miranda enjoys spending time with her son, traveling, reading, and the outdoors.