The best way to invest is for the long term. Most types of investments, such as stocks and bonds, naturally experience fluctuations in price. Trying to “game the system” by predicting these fluctuations can result in winning some fast cash, but overall, this type of strategy is risky and will likely leave you with a net loss. Instead, you have to ignore these micro-fluctuations as much as possible and choose investments that will yield you greater value over the course of many years.
How to Get Out From an Investment
Some investments are easier to get out of than others. For example, stocks and other marketable assets are somewhat liquid. As RJO Futures suggests, a stop order is a fantastic tool you can use to get out of a stock or mutual fund investment if it hits a certain price. However, real estate is much harder to get rid of. As Trulia explains, sometimes houses simply won’t sell due to market conditions or lack of consumer interest. In any case, the logistics of selling only matter when you’ve decided to sell, and your timing may affect your asset’s liquidity—so how do you know the best time to sell?
Signs You Should Get Out
These are six surefire signs it’s time to get out of your investment:
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- A significant dip in price or value. If you notice a stock price bear a significant drop in value, it could be a sign of further losses to come. But where do you cut this off? Cabot recommends a general rule of selling a stock if, at the end of the day, it shows a loss of between 10 and 20 percent. However, this rule should be taken into careful consideration with other variables; for example, some strong long-term stocks may easily be able to overcome such a loss and different individuals will have different risk tolerances. In any scenario, a significant loss is worth taking a look at; don’t be afraid to get out early if you anticipate further declines.
- A change in leadership. The leadership of a company, or the manager of a fund, is the group of people most responsible for that investment’s future development. If one of your top holdings undergoes a change in leadership, you owe it to yourself to do some background research on the new leaders. How much experience do they have? What ideas do they have for the future? A bad sign here could be a good reason to get out early.
- Seriously missed sales targets. If a company projects a certain amount of sales but comes up egregiously short, it’s a sign of two things: one, the company isn’t performing as well as it should be, and two, the company’s leadership isn’t very good at envisioning the future. These signs should tell you the company’s not in a good place, which is why missed sales targets are frequently associated with a major drop in value. If you see this, don’t be afraid to take the minor loss to save yourself major losses in the future—capital losses are a tax write-off, anyway.
- A reconsidered buy. Though this isn’t the same for every type of investment, it’s a good rule of thumb. When you bought the investment, like a stock, you considered it a “buy.” However, if you no longer consider it a “buy,” there’s no reason to continue holding onto it—and you may no longer consider it a buy for a variety of reasons. In any case, it pays to get out early here.
- Bad news on the horizon. Every type of investment faces bad news from time to time, but if you fear bad news is on the horizon, it may be in your best interest to bail before that news hits (or before it starts affecting your environment). For example, if you own a house in a neighborhood that’s about to be exposed to some new commercial construction, it could be good motivation to unload the asset before it dips in value.
- A changing environment. If the environment around your investment begins to change significantly, it’s a good opportunity to cut your losses (or prevent them altogether). Any number of environmental factors could affect the quality of your investment, so look everywhere. For example, a new competitor may emerge to threaten a company, or an overall economic downturn could be forcing people to invest in more modest homes.
Just one of these signs by itself may not be enough to warrant a full bailout from your investment; especially if it’s a company, a fund, or an asset you believe in for the long term. Even great investments go through rough periods, and it’s worth noting that temporary fluctuations should never persuade you to dump a gem. Still, if you see more than one of these signs or your instincts tell you that bad things are in store for this particular investment’s future, get out as soon as possible. Avoiding losses are as big a part of investing as chasing gains—maybe even bigger.