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When to Sell Your Investments - Outside View by PersonalFN

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When to Sell Your Investments
Oct 1, 2015

We often hear how important it is to start saving and investing to meet your financial goals,, but little is said about selling investments. Remember that redeeming your investments at the right time is almost as vital as making them at the right time. When we don't sell our investments at the most opportune time, they may generate lower returns, and take you further away from achieving your objectives. If you are wondering how to know the right time to sell your investments, well, that's really a million dollar question. While this could be viewed more as a subjective question, there are certain parameters that can help you decide when to redeem your "lazy" investments.

  • Market conditions:

    While they may not affect non-market-linked instruments such as fixed deposits, Public Provident Fund (PPF), market conditions play an important role in determining the value of market-linked instruments such as stocks, mutual funds, bonds, etc. Equity investments are affected by various macro-economic, industry, and company-specific factors. An analysis of these factors give us insights into how equity oriented investment instruments are priced.

    Selling instruments when markets are at high could help you achieve a significant profit on your investments. However, it is important to make sure you avoid timing the market in this endeavor. Remember that while investing in market-linked debt instruments as well, you must analyse the interest rate scenario, inflation rate, and so on.
  • Investments that generate inadequate returns:

    If you've invested in an instrument that has been generating poor returns, especially in longer timeframes of three years and/or five years, you must get rid of them before it is too late. It is prudent to get out of investments that aren't generating adequate risk-adjusted returns.
  • Investment objectives undergo a change:

    When a mutual fund scheme brings about a major change in its investment objective, which isn't as per your financial or personal objectives, you must redeem that fund. Similarly, in the case of stocks, if a company brings about changes in its business or strategies, which you aren't comfortable with, sell that stock.
  • Company with unfair practices or low credit rating:

    Immediately redeem the investments when the company whose stocks you have purchased or the mutual fund whose units you have bought has indulged in any unfair or fraudulent activities, as such businesses /companies cannot be trusted and will prove to become holes in your financial bucket.

    Also, if the debt instrument which you have bought has received a junk rating from the credit rating agencies, it would be sensible to lower your risk exposure by selling such instruments.
  • Need to rebalance your portfolio:

    Portfolio rebalancing rebalancing is correcting the deviations in the original asset allocation. For example, assume that initially you invested 70% in equity, 20% in debt, and 10% in gold. After a few years, equity grew to 80% and gold to 15% of your portfolio when their values increased. As a portfolio rebalancing exercise, you could cut the financial exposure from equity and gold and redirect the money into a debt fund to achieve the asset mix you had started off with.

    It is possible for an asset class to significantly drift away from the initial allocation due to the appreciation/depreciation in its own value or the value of other assets. If you don't rebalance your portfolio from time to time, there is a possibility that the unbalanced portfolio may be skewed towards a particular asset class, exposing you to a portfolio concentration risk.

Re-balance your portfolio...

  • When deviation of a particular asset class crosses the preset limit: Say your original equity allocation of 70% increases to 85% and you have earmarked the deviation limit of 10% in the initial allocation. This is when it becomes necessary to rejig your portfolio.
  • When there is a change in financial circumstances: If income reduces, then your risk appetite might also reduce. In such a scenario, you might want to decrease the funds allocated towards risky asset classes such as real estate and equities.
  • When there is a change in your financial goals: In the case of additions or deletions in the number of your financial goals or the amount required to fulfill your goals, your stipulated asset allocation would need to be altered.
  • When you have windfall gains/losses: This may cause your risk appetite to reduce and you might want to lower your exposure to equities. Vice-a-versa could be also true in the case of windfall gains.
  • Nearness to financial goals: When you have adequate time (in terms of number of years) to meet a financial goal, you can afford to expose your portfolio to higher risk, which might enable you to create more wealth in the long term. But as the timeline of this financial goal draws nearer, prudence advises you to shift exposure from risky assets to relatively safer debt instruments to preclude the wealth erosion in years to come.
  • Age: As you progress and arrive closer to retirement, it is necessary to move towards safer avenues such as debt and money market instruments. So, you should be investing in fixed deposit, small saving schemes or debt funds in accordance to your investment horizon.
  • Change in the outlook for a particular asset class: Although PersonalFN strictly recommends investors to follow goal-based asset allocation, some of you might like to follow a tactical asset allocation approach. This is one of the approaches used when allocating assets. Under this, the portfolio is rebalanced depending on the outlook for various asset classes to take advantage of opportunities and generate superior returns.

PersonalFN is of the view that both the activities of making investments and redeeming them must be as per your financial plan and asset allocation strategy, apart from the above mentioned parameters. We understand that not many people have the time or expertise required to make financial plans, determine where and how much to invest, or when to redeem them. Hence, taking the help of an experienced and qualified financial planner can be very fruitful to meet your financial objectives.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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