OPINION: Selling investments is almost as important as buying them.
And yet, although that is certainly true, most investors put a lot more time, effort and energy into deciding what they will buy rather than what they will sell.
In fact, I think that many of us are not good sellers even though we may be good buyers. We sell when we shouldn’t and, even more problematic, we don’t sell when we should.
This is most common when people buy a dud. They buy an investment which soon after takes a big fall in value: it is plain to everyone that the purchase was a mistake.
However, instead of selling this investment dog and cutting their losses, they hold on.
Most commonly I hear people say that they will sell when the investment comes back to what they paid for it. This is the sunk cost fallacy – that is, continuing to invest in a lost cause.
The problem is, we focus on the cost of the investment (the money that we have sunk into it) rather than its future performance. This can be seriously damaging: after all the dog that lost you the money is unlikely to get it back for you.
The more money you have sunk into an investment, the harder it is to abandon it. This is well known in psychology: we just can’t quit losing battles.
To quit an investment is to own up and the mistake becomes obvious. No one likes to do that.
It is hard, but the best investors take the losses on the chin: they sell and get their money into something better, something that is not a dog and which will make money.
Another common mistake I see investors make is when they fail to take their profits.
A good investment grows in value and, in doing so, becomes a bigger and bigger part of the portfolio. That may be great while it is performing but, when it turns, the fall impacts the portfolio heavily because it is now such a large holding.
Good investors constantly trim their holdings to take risk off the table by ensuring they do not have exposures that are too large.
It may hurt to sell down an investment that is doing well but as the holding grows in size, so too does risk.
Most good investors keep their holdings within certain limits – a rule that no holding will make up more than 5 per cent of the portfolio is common. Knowing that the good times may not last forever, these investors have the discipline to keep the portfolio trimmed to the right size.
A constant readiness to sell is an important attribute for any investor. It is sometimes a difficult call to sell or hold, but always remember that no one ever goes broke making a profit.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.