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Three really BAD reasons to sell an investment

July 28, 2014 16:24 IST

Three really BAD reasons to sell an investment

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Morningstar.in

Here's why you should not hit the panic button when the going gets tough. Also why you should not sell if the going's too good. :-)

Consider a scenario where the BSE Sensex plunges by 300 points in a single day. Typically the first reaction is to get out -- fast. But just as an investment should be made only after applying thought, setting a goal and conducting research, the decision to sell should also be a well-thought-out and disciplined one.

In other words, it is important to sell an investment for the right reason. For instance, in the case above, a panic sell in the heat of crumbling markets is a strict no-no.

It is important for you to develop your selling discipline. That means establishing a set of selling parameters for your investments.

Selling according to pre-established rules force you to have a good reason for getting out of an investment -- a reason that's based on your personal investment philosophy and predetermined criteria.

1. The investment has lost a lot

Despite the attention given to ups and downs of an investment's price, an investment's price movement doesn't tell you much about the investment's future prospects.

Let's say you own a stock or fund that has fared poorly. It's tempting to sell, right? But think about it. What good does it do to sell after the investment has fallen? Whatever the bad news was (if there was any), it has already been incorporated in the investment's price.

The more rational reaction to a drop in an investment's price is often exactly the opposite of a sale. If you really like the investment and continue to be convinced about its prospects, perhaps you should take advantage of the lower price to buy more.

You are almost certain to make more money in the long-run if you ignore what other investors are doing. That means ignoring short-term price movements. Selling only turns paper losses into actual losses.

2. The investment has gained a lot

Likewise, just because an investment has risen is no reason to sell. It might seem like the natural thing to do -- sell (or fail to buy) a great investment simply because it has already had a good run. It has to lose steam, right?

But several examples show that this doesn't always hold true. Investments don't always have to fade out after a good run. This is yet another case of ignoring the investment's long-term potential. The fact is you are likely to be better off, if you stayed away from daily market updates. That's just noise which, if listened to, can interfere with your long-term investment success.

3. You need the money

Selling because you need the money -- regardless of how your investments are doing -- is a terrible position to be in, and one you should avoid at all costs. Before you invest in stocks or funds, make sure that you only invest that portion of your monies that you can commit for the long haul. Also, it is important to have an emergency reserve in place, invested in a liquid avenue to meet contingencies. This will ensure that you don't have to dip into your investments and liquidate them prematurely.

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Image: A stock broker reacts while trading at a brokerage firm in Mumbai March 13, 2008 when Indian shares fell nearly 5 per cent by Thursday afternoon to their lowest in more than six months
Photographs: Arko Datta/Reuters
Tags: BAD , BSE