When should I exit my investment?

by 17 May, 2018

Picking the right time to buy or sell a stock can sometimes seem like a roll of the dice

Considering when to sell a security is just as important as thinking about when to buy, because the rewards from a succesful trade cannot be reaped until a position is closed. This presents an investor with a dilemma, namely, when should they exit the trade and sell the stock of their choosing?

Sadly, it’s almost impossible to predict with 100% accuracy when the right time to exit is. In an ideal scenario, the investor would sell a security when its price has reached a peak, enabling them to take the maximum profit possible from their initial investment, but things aren’t always so easy in investing. Markets are inherently unstable and volatility in the price of an asset can come along when investors least expect it.

Due to the already lofty valuations of stocks in American markets in particular (see Amazon, Alphabet and other giant tech firms for clear examples of this), an investor may believe the value of their investment can go no higher, but often will. As an example in a separate asset class, Bitcoin is a good example. Investors were convinced the price would stop at $1000, then $5000, then $10000. When it hit $15000 (an already extremely high valuation), many were convinced that it was in bubble-territory and could go no higher, but within weeks it was at $20000. During that time, it was very difficult for anyone to say the market had peaked, since within days it could have added another $5000 in value!

Similarly, no investor can control external events which affect the markets. Poor weather can hit agricultural stocks or retailers as less people go out to buy goods, while an economic downturn can also affect consumer confidence. These kinds of trends can already be underway before an investor can begin to understand how it will affect their portfolio, so it’s best to periodically check in on your investments.

No one has a crystal ball, but there are strategies an investor can use to to try and stay focused and maximise their returns.

Define your goals

Investors should try to attach a purpose to each investment they make. It could be to achieve a specific goal, like wealth appreciation over the longer term, or hedging against inflation. The objective will help you decide when to sell and at what price. Some investors may want to make a quick profit on an investment by trading company earnings announcements, for example.

Decide a holding period

It is very difficult to time the market, so, one should decide the investment time horizon.

There are many different investment strategies. Some favour shorter-term gains. The word ‘trading’ is normally used to describe faster buying and selling of assets, whereas ‘investing’ more often refers to holding onto an investment for a longer time. Both can be perfectly reasonable ways to make a success of an investment.

If an investor makes a firm decision to buy and hold a security for the long term, this means they will be less likely to pay attention to short term market volatility, which is often a good thing.

A fixed holding period allows you to track and review your investments without getting worried by short-term volatility.

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