When You Invest at the Bottom, When Do You Sell?

August 1st, 2007 • Related • Filed Under • by admin

Most unseasoned investors have the bad habit of buying high when the market is booming and it seems that everyone is making the money, and then selling when the market makes a correction in a vain attempt to cut their losses. This clearly isn’t a winning strategy for investing by any means, yet lots of people seem to do it. The smart money says that you should buy when the market’s not doing so hot which will allow you to reap the gains when the economy does decide to turn around, but when do you decide to get out of the game, take your earnings, and go home?

The Dow has been hitting all sorts of records and new all-time highs, but you aren’t hearing any members of the financial media telling you to sell because we’re doing great and at the highest point the market’s ever been. Does it make sense to sell just because of lots of other people are buying or should you hold on for the long term and only take the money out when you need to live?

Here are the situations in which an investor should consider selling his or her positions:

You need your money, or you need it to be secure. If you’re at the point in life where you want to retire, or are substantially more adverse to risk than before, it makes sense to take your money out. You shouldn’t keep an investment in the market if it means that you have to severely sacrifice your standard of living just to get by. If you’re at a point in life where you desire much less risk than before, say when you’re getting older, it makes sense to take some of the money out of the market and instead put it into a safer investment.

You’re no longer confident about the investment. If your investment has done well, but you have solid reason to believe that it’s not going to go anywhere beyond where it’s at now, it’s okay to sell it. You shouldn’t do this on a feeling and a prayer, but if you regularly do your research and think there are better places to put your money, you should move it.

The Market’s at the Top and a Correction is Due. This isn’t going to work for everyone, because it’s very hard to predict when the market has peaked. It’s easy to say that you’ll sell when others are buying, but that doesn’t always turn out. There was a period in 1999 and 2000 where the prices for some stocks made absolutely zero business sense, but the ride seemed to go on for over a year before the bottom finally fell out and the market made a severe correction when the dot-com bubble burst. You’re taking a bit of a guess here and could lose out on potential gains, but if the market truly is headed down, you’ll prevent a lot of potential losses as well.

The question when’s the right time to sell is a bit of a tricky one. You certainly don’t want to sell just because other’s are selling, or necessarily because other people are buying it. A good rule of thumb is that if you really need the money, or can no longer handle the risk of the investment, it’s probably time to take your money out.