Most types of investments have the potential to gain as well as lose value. This is true with mutual funds, stocks, real estate and other types of investments. The only surefire way to lock in a gain from these investments is to sell them, but this is also the only way to lock in a loss.
However, many investors struggle with the decision to sell investments, and you understandably want to make a educated and timely decision about your investments. After all, there may be a potential for the return on these investments to continue to increase if you hold on a little longer.
In addition, you may wonder if you will generate a substantial return through a new investment after selling this one. By examining the investment sales process more clearly, you can make a wise decision about your finances.
Take Emotion Out of the Equation
Investors often make emotional decisions, and this may not always work in your favor. Finances should always be viewed objectively if you want to make an informed, analytical decision. You should avoid think about “what if” scenarios. For example, do not think about what may happen if you hang onto the investment. Instead, carefully analyze the current and projected future market conditions.
Consider the actual perceived impact associated with hanging onto the investment based on numbers alone. Even if your investment has lost money and selling it would lock in a gain, it is important to determine the right time to walk away from the investment.
By focusing on legitimate and realistic numbers, you will be able to make a better overall investment decision.
Explore the Current Value of the Investment
You likely conducted considerable research before making your investment buying decision, but market factors can change quickly. It is critical that you re-examine the market to create a current estimated fair market value.
In some cases, such as with real estate, you may need to reach out to third parties for a value estimation. When you understand the current value of the investment, you will be able to determine the gain or loss that you can lock in by selling.
However, it is also important to consider what future market conditions may be as well as the additional income the asset may throw off between now and a projected future sales date. Many investments do generate income, such as real estate and dividend-producing stocks.
Consider the Costs to Sell the Investment
If you are leaning toward selling the investment, you should also consider how much money it would cost to sell it. To sell real estate, for example, you may need to pay a real estate commission fee that could be as high as six percent of the sales price as well as various other closing costs. You may also need to make property repairs and take other steps to fix the property up before selling it.
Stocks and mutual funds also have fees, such as brokerage fees. In many cases, taxes on the gain will also be imposed, and these can be considerable. You will need to estimate your year-end tax liability to ensure that you can afford to pay the taxes on the investment’s sale in the current tax year.
Analyze the Impact Selling Will Have on Your Portfolio
Another very important factor to consider relates to the diversification of your investment portfolio. Many investors work hard to create a diversified portfolio that creates the ideal return on investment while mitigating risk. When you sell your investment, you immediately turn a specific investment type, such as real estate or stocks, into liquid cash. This directly changes the diversification of your portfolio.
You may need to explore the ideal current diversification that you are comfortable with and examine some of the different new investments that you may purchase with the proceeds from the investment.
However, if you will be selling the investment for a loss, you may not be able to diversify in this manner. In addition, you may need to pay cash out of your pocket to sell the investment for a loss, and this could further alter your portfolio’s diversification.
Focus on Your Investment Objectives
If you are like most investors, you have both short-term and long-term investment objectives that you may want to meet. Most investors are focused heavily on meeting their retirement goals. You may need to invest in assets that produce a stable cash flow so that you can support yourself financially in your retired years. You may be focused on increasing the value of your portfolio so that you can draw a recurring income stream from fund distributions.
On the other hand, you may also be interested in creating a legacy that you can pass down to your loved ones. Many people want their loved ones to have a sizable inheritance, and your investment decisions will directly impact that goal.
You may consider how easily specific types of investments can be transferred to your loved ones at your passing as well as how beneficial their equity growth and overall cash flow may provide to them.
It is necessary to sell investments periodically to lock in gains, to re-position your portfolio, for diversification purposes and more. If you are interested in selling assets, it is important to carefully analyze the situation so that you make the wisest decision possible.
Carefully analyze your reasons for making the sell to ensure that you do not make an emotional decision. Then, crunch the current numbers, and review projected future numbers.
By taking these critical steps, you can more confidently sell your investments knowing that you are doing so for the right reasons.