My colleague Mark has written before on when investors should sell shares . Plenty of people tell you what to buy, but few weigh in on when you should sell your investments.

He uses his portfolio as an example of why he may sell an investment. The short of it is that he very rarely sells investments.

This is not the right solution for other investors. This article explores some of the best and worst reasons why you sell an investment.

Best reasons to sell an investment

1. You’ve reached your goal

The first reason is good news. You’ve reached your goal. You are saving money for your children's university tuition, a home, a car, or retirement. Retirement is a little bit different as it is something that you gradually unwind to achieve your goal. Retirement generally involves periodically selling assets. Investments and investing are a means to an end. It’s not about accumulating the most money or adding commas to your brokerage account. It’s about getting to your financial goal. Simply put, you need the cash for your financial goal, so you sell.

2. Fundamental changes to your investment

The second reason is broad, and it is that there are fundamental changes to the investment. It is rare but sometimes, an ETF undergoes a meaningful change in strategy. There are also instances where investments or products have their fees significantly increased. A good reason to sell an investment is if a product or investment no longer serves the purpose that you originally bought it for.

Having an Investment Policy Statement (IPS) adds structure to this decision-making process. It outlines the specific circumstances in which you buy and sell investments. This structure lowers the chance of poor investor behaviour.

This has happened to me before. The fees on my superannuation fund drastically increased. This would result in the loss of hundreds of thousands of dollars to my retirement balance if I did not take action. My IPS stipulated that low-fees were a core tenet of the product that I would use for my superannuation savings. The fund was no longer serving its purpose, and I made a calculated decision to switch to a lower fee option. It’s important that there is a relatively high hurdle for these changes within your Investment Policy Statement, because otherwise switching often may be to the detriment of your total return outcomes. You may end up spending more on transaction fees and tax than it’s worth.

3. Your thesis is broken

A good reason to sell is that the thesis for why you bought your investment no longer holds. This is different to the second reason to sell in that this has nothing to do with the mechanics of your investment. In this case your fundamental belief in the future prospects of the investment no longer applies.

For example, you’ve purchased Alphabet because you believe that the company will continue to dominate search which warrants a Wide Economic Moat. However, the US Justice Department wins the current suit and forces Chrome to be divested and ends agreements for Google to be the primary search engine on various devices. You don’t believe in the future prospects of the company anymore and believe this event to be unrecoverable.

The purpose of an investment is to achieve your financial goals. If they no longer can help you achieve your financial goal and your belief in the investment is lost, there is no point holding onto it.

There are also several reasons that are bad reasons to sell investments.

Worst reasons to sell investments

1. Short-term performance

This is the classic investor mistake. The market’s up 20% over two quarters, and you’ve got a fund that’s only up 10%. Or the market’s down 5% and your fund’s down 10%. You’re unhappy, but the catch is short-term performance is largely noise. Even the best investors will have periods where they underperform.

Typically, funds have sector bias or a style bias and some shares may have cyclicality that impacts whether they are in or out of favour. That means sometimes they’ll be particularly in favour or sometimes they’ll be out of favour. Investors need to focus on long-term performance as the classic mistake of selling due to short-term performance often comes back to bite the investor when the cycle continues, and performance changes.

2. Making speculative bets

Investors like to speculate how major events will impact their portfolios and make tactical allocations based on this. This often includes selling assets and moving to cash to protect themselves. For long-term investors, take the opportunity to zoom out on the performance graph. Through all the market drops and rallies, there have been many elections, macroeconomic events, many policy shifts and changes. The market still trends upwards regardless of these events.

For many macro-economic calls and events that have already happened, the market is extremely efficient and would have already priced these events in. It is difficult for individual investors to react in time to capitalise on these events. Most try to guess the direction of the wind, and are speculating. Having high quality assets and an investment policy statement (IPS) that can provide clarity to investors in turbulent conditions as the media obsesses over these events, that often do not cause a blip on long-term performance graphs.

3. Fear of missing out (FOMO)

Sometimes, investors just aren’t happy with the performance on their investments and want more. It is human nature to want more. It is human nature to want to maximise your wealth and make the best return possible.

We are driven by fear and greed, which is a formula for buying at the top of the market and selling at the bottom. Both individual and professional investors create elaborate models and theories designed to dictate when and why to buy or sell a security. Despite these models there is still a high probability that investors will panic when the market is going down and fear missing out on profits when it keeps climbing.

These actions have been shown to be to the detriment of the returns an investor achieves. This is called the ‘behaviour gap’—the gap between an investment return and the return an investor gets in the same time period. Constantly switching between investments and assets due to emotional responses has been proven to reduce returns for the majority of investors.
The study has shown that the average investors earned 1.7% less than the total returns that their fund investments generated over the same period.

This gap between the returns investors actually experience and reported total returns can be attributed to a few reasons – cash flow timing, costs and tax efficiency.

FOMO is a recipe for lower returns, and chances are you’d have better outcomes by just staying invested and logging out of your account.

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