The psychology of selling investments
Tips and strategies from Tim Mackay FCA to help you decide when, and how, to sell investments.
- There is a dearth of advice available on what stocks should be sold and when.
- Selling investments is a lot more difficult than buying them.
- Five tips for determining when the time is right to sell an investment.
One of my favourite songs is Kenny Rogers’ The Gambler, the story of a washed up gambler sharing one last piece of advice with a fellow train traveller before dying.
The dying gambler shares some great advice about knowing when to “fold ‘em”, “hold ‘em” and “run”. Every investor at some point faces the dilemma of deciding whether they should hold onto an investment or sell it.
There are plenty of books about what stocks should be bought, but very few offer advice on what stocks should be sold, and when.
The psychology of selling
Unless you are a professional investor, your emotions play tricks that work against you when selling.
The first trick is we have a stronger emotional reaction to losing money than we do to gaining it. Losses hurt us more than gains make us happy. We go out of our way to avoid losses, sometimes irrationally avoiding gains in the process.
The second trick our minds play involves our disposition. We have a tendency to sell our winners and hold our losers. When we sell winners we feel pride and a sense of victory, yet we cling to our losers hoping to, at worst, break even.
If we sell a loser before breaking even, we feel shame and regret that we made a mistake. There is nothing wrong with making mistakes when investing; what hurts is not having the courage to correct mistakes quickly.
It doesn’t matter if selling at a gain or a loss
These unconscious investing biases undermine our ability to make money. We sell the good investments to seek pride and hold the bad ones to avoid regret.
Let’s say you hold an investment worth $100 that you bought 12 months ago for $90 (an unrealised gain of $10). Compare that to holding the same investment but that you bought one month ago for $110 (an unrealised loss of $10).
In neither case should the unrealised gain or loss come into your decision to sell or keep the investment. It just doesn’t matter. What matters are the prospects for that investment. Do you think it will go up or go down from today?
Taxes and fees
My mantra when it comes to taxes and investing is that you should be tax aware, not tax driven. You should clearly be mindful of the tax implications of selling, but this should rarely be the primary reason for selling.
It goes without saying that you should check if you have held an investment for more than one year to potentially reduce your tax by up to 50%. Also, watch your brokerage costs if you are trading often as they can add up.
Have a plan
Buying is relatively easy and fills us with hope that we will make money. Selling involves difficult decisions on what and when to sell, and what to re-invest in. When selling, ensure you have a strategy for what to do with the proceeds of the sale.
If you had cash to invest today, would you invest it in the asset you’re considering selling? If your answer is “no”, then that’s a good reason to sell that asset immediately. Don’t procrastinate. Legendary investor Warren Buffett even fell into this trap when he admitted to being slow to sell shares in British retailer Tesco.
Selling to rebalance
One of the best reasons for selling investments is to regularly rebalance your portfolio to bring it back to your target asset allocation. This may involve at least partially selling outperforming investments and some poorly performing ones.
Do you have an exit plan
Tim Mackay FCA on why creating an exit plan can help ease you into a hassle-free retirement.READ NOW.
Top tips on when to fold ‘em
- Have a strategy for when to sell (such as a set share price or index that reminds you to review your investments).
- Don’t get emotional over any investment. If another investment has better prospects don’t procrastinate on selling.
- Use carried forward tax losses or sell assets with capital losses to offset your capital gains.
- Check market liquidity in your investment before selling and set a limit order with your broker.
- For positions in profit, don’t get greedy. Be prepared to take some gains off the table and remember you only have a paper profit until you actually sell.
This article is part of an ongoing Wealth Management column offering tips on personal wealth management and analysis of issues within the wealth management profession. Have something you’d like this column to cover? Email the Acuity team now.