When is the best time to sell an investment? This is possibly one of the most important questions you can ask, and an equally important action to take with an investment portfolio. If the investment you purchase doubles in value, do you sell some or all of it to capture your gains or do you let it ride? If your investment has fallen in value, do you sell it to avoid losing more or hold on to it hoping it will regain its value? These are questions investors struggle with on a regular basis.
An Answer from Academic Research
One way to address the challenging question of when to sell an investment is to implement a systematic process of portfolio rebalancing. Rebalancing is the process of periodically buying or selling assets within an investment portfolio to maintain the original or desired allocation and level of risk and reward. Academic studies show that your asset allocation is a crucial factor in how your portfolio might potentially fulfill your risk and return preferences.
At Hammond Iles Wealth Advisors, we provide continuous and ongoing management of your account and typically review our advisory accounts as frequently as each quarter. We compare each account to the client’s desired allocation and risk tolerance. If the asset class allocation percentage has shifted due to market fluctuations, we place trades to rebalance the portfolio back to the desired level of risk. This process tends to sell a portion of the equity investments while financial markets are high and buy more equities when the financial markets are low.
Without Rebalancing, Do You Need Luck and Predictions?
Although it might sound like a relatively easy process, rebalancing can be challenging for investors. There are many reasons why an investor may not rebalance their portfolio—from lack of time or interest to monitor their investment portfolio to uncertainty based on personal biases, emotions, instincts, and perceptions that they have about money.
During a period when the financial markets crash due to an economic bubble or recession, or world events such as the uncertain outlook created by the pandemic, buying more equity investments while the financial markets are going down is not always easy. A systematic process which is not based on emotion can make it easier. Without a methodical rebalancing process in place, over the long term you could end up with an investment portfolio that looks significantly different from your original allocations and carries dramatically more risk than you are willing to take. If the equity portion of your portfolio grows faster than the fixed income portion, the risk within your portfolio may inherently increase as the portion of equities in your portfolio grows.
Without portfolio rebalancing, investors may attempt to self-manage their investment portfolio through stock picking, market timing, and track record investing. Rather than using a globally diversified investment portfolio grounded in academic investing principles, investors may try to pick the next hot stock based on a feeling, their outlook on the company or market sector, or opinions and recommendations shared in news media and online. Once purchased, the decision to sell some or all of the investment is then based on a new feeling, outlook, opinion, or recommendation. Instead of having a scientific methodology for when to implement potential changes, investors sometimes make decisions based on a future prediction, or an investment’s past performance or track record. All of these are forms are speculation and gambling with your money. And here’s the thing: No one can predict the future!
Another scenario is investors who do nothing. They set their investment portfolio allocation and forget it. Put their head in the sand, let it ride, and hope their investment portfolio works out. Without any adjustments along the way, your portfolio can end up with risk and returns you did not expect. It is like traveling by airplane from Los Angeles to New York. The pilots of the plane make periodic adjustments based on measurements and tools to keep the plane on track. There is a significant amount of unforeseen and unknown factors that will work to pull the plane off course. Unless the pilots systematically adjust the plane’s course, the flight path could result in a significant deviation from the intended destination. Your portfolio works the same way. There are factors that impact the value and volatility of your portfolio and the financial markets overall. It’s important to monitor your progress on the way to your destination and the amount of risk you are taking to get there.
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Invest with Patience and Courage for More Comfort and Confidence
Systematic rebalancing removes the anguish of needing to predict the future and transforms investing from a hope and a prayer to a process that may offer more comfort and confidence in the long-term performance of your portfolio. As mentioned above, academic studies show that asset allocation is a critical aspect of how your portfolio might deliver on your goals, and why rebalancing is essential to prudent long-term investing. We believe systematic rebalancing is a solution to the age-old question of, “When is the best time to sell my investment?”
Having a financial plan, a solid understanding of your investment portfolio and the processes used to manage it may allow you to worry less when the markets are volatile. We offer monthly online financial education workshops, an investing community, and a no-cost initial conversation with a financial coach for anyone who has questions on investing and money matters.
If you're ready to take action toward gaining more peace, comfort, and confidence around your finances, schedule a date on the calendar or contact us at (800) 416-1655 or hello@hiwealth.com to book a convenient conversation. We are here to help you and your family. Our firm has no minimum investment amount because we believe everyone needs a fair chance to get started.