Has your share lost 20% of its value since you acquired it? Has your unit trust investment been steadily falling since the day you bought it?
Selling a losing position and reinvesting the money in a more profitable security is probably the most logical tactic to apply in order to enhance the overall value of your portfolio.
This technique can be one of the most difficult to execute. You have to ask yourself if you had made a mistake with your investment in the first place and you must also decide whether to sell or hold on to the depreciating asset. When you can easily find recommendations on what to buy, it's harder to get advice on when to cut your losses.
To minimize the odds of ending up with worthless share certificates or depreciating unit trusts, you should establish a sell strategy. This is when you can think most clearly about why and when to sell. You could be too upset to think rationally if you start to analyze your investment when its value drops to a level that you can't tolerate.
So, a sell strategy helps you to avoid an emotional decision making that usually leads to costly mistakes, like the knee-jerk reaction of getting out fast when the stock market drops.
A well-defined sell strategy has cut-loss triggers to prompt certain actions, which must include an evaluation of the condition of your investment and its future potential, before you sell your losing investment.
Cut-loss triggers act like an insurance policy, which is protecting your portfolio against catastrophic losses as they remind you to assess your investment or to sell it. These triggers are used to make sure that mistakes are not more costly than they could be.
Some investors have different investing profiles and strategies, thus determine your cut-loss triggers based on your personal risk tolerance and investing time frame. To do so, first, consider the risk level that you're able to tolerate when selecting the asset. Say, for instance, you decided to tolerate a loss of 15% to 20%. Then, from here, you can determine your selling point. If your investment falls in this range, hold on to it.
However, investors with a short investment period may prefer a smaller percentage decline of perhaps 3%, because it avoids big losses. On the other hand, investors with a three to five year time frame can tolerate a higher percentage decline as a losing investment has time to recover its position.
Action triggers are also part of a sell strategy. For instance, you decide to sell your investment if it drops 8% below your purchase price. Set a warning point at 5% to prompt you to take action by looking for information that can be used to evaluate the future potential of your investment. You should also consider the next asset to invest in before your existing investment continues to depreciate to its cut-loss level.
Some investors convert these triggers to stop-loss orders, which are instructions to the brokers to sell their shares at a predetermined price. These instructions are useful when you're unable to monitor your stocks and evaluate your investments over a period of time.
Michael Russell Your Independent guide to Investing Article Source: http://EzineArticles.com/?expert=Michael_Russell |
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