When to Sell Your Investment
If you’re new to investing and just getting started, it can be easy to get hung up on what to buy, and when to buy it. Ultimately though, there are countless things to invest in, and many reasons to purchase—usually with a pretty clear indication of when that purchase makes sense.
The hard part about investing isn’t knowing what or when to buy, it’s knowing when to sell. Selling is infinitely more important than when or what you buy, because selling is the moment where your gains (or losses) are realized.
Here are 5 ways to think about when to get out before your win turns to a loss:
1. When your thesis is no longer valid
Hopefully when you hit buy, you had a reason to do so. Hopefully you also wrote down that reason. If that reason is no longer valid due to changes in the market, economy, world, etc. then it is time to get out.
2. The narrative has changed
This is an indicator that you might be heading towards #1. Understanding what other market participants think is key to understanding how markets might react. As the market narrative shifts, your original market plan or thesis may become invalid. If so, it is time to get out.
3. Price crosses 200-day simple moving average
The 200-day simple moving average is a common technical indicator used to analyze the current trend of a particular investment. Look for prices to cross the average to indicate a change in the trend. This can signal it is time to get out.
4. Sentiment gets extreme
When your Uber driver is telling you about how much money he just made in XYZ, it is probably time to sell. When an investment becomes crowded, there is nobody left to buy and the price is prime for a reversal. If you notice this, get out.
5. It keeps you up at night
Everyone has a different threshold for risk. If you are overly worried about your investment, chances are it's too risky for you. Pay attention to position sizing and make sure that you have a plan to limit your loss. An investment isn't worth a reduction in quality of life: get out.
The key takeaway here is that regardless of what you’re investing in, you need to have a clear reason for buying (so you know when that reason is no longer valid), and you need to have a clear exit plan (so you can minimize your losses if your thesis doesn’t pan out).
One of the most important pieces of investment advice I’ve received came from a good friend and mentor who once said “you need to have it all written down before you even put on the trade”.
