These days, you can get started investing online with only a couple of dollars.
And the whole process of creating and funding a brokerage account can usually be done from your couch, even if you only have a few minutes to spare.
So at the end of the day, it’s fair to say we’re extremely lucky to live in this era of unparalleled and ever-increasing financial access.
But unfortunately, especially for newer investors, investing itself isn’t quite as easy as opening your account.
In fact, it turns out there are myriad different ways to lose your money in financial markets. And unfortunately, common sense doesn’t preclude us from many of the common investing errors!
Some of the more popular mistakes you might be wary of include:
- Don’t buy stocks on a tip! Just because your friend, colleague or favorite uncle is making an investment, doesn’t mean it’s a good one! If you habitually buy companies based on a hot tip, you’re basically gambling with your hard-earned savings. Stop it!
- Buying too much of one investment. This is another risky proposition. And not only is it financially perilous, it can also be immensely stressful to put all your eggs in one basket. You might even find yourself tossing and turning at night, afraid of what you might wake up to.
- Trading too frequently! Even though trading stocks online is easy (and some would argue fun), don’t get carried away! Because each time you place a trade you open yourself up to a potential mistake. Plus, if you aren’t careful you’ll find the commissions can really add up to take a bite out of your bottom line.
Now while you should certainly pay attention to these common investing errors, and as insidious as they can be, there’s one much larger market mistake you’ll definitely want to be aware of.
So what is this big (and expensive!) investing mistake to avoid? Let me show you.
Why Not Having an Exit Strategy Will Cost You
Most investors start out with the very best of intentions. They want to put their money to work with the hopes of saving for a downpayment on a house, putting their kids through college or simply having enough leftover to enjoy their golden years. But one thing many self-directed investors seem to continually gloss over is how (and when) to sell the securities in their portfolios.
And it doesn’t matter what your time frame is, or what kind of assets you buy. In every case you should be able to articulate why you’ll sell, before you ever buy. Because chances are, at some point, you’re going to want that money. So you had better have some rules around when you can access it!
The reason this is so important is because without a logical and well-thought out exit strategy, you open yourself up to huge risk. You’re more likely to sell at the worst possible moment, which can cripple your financial future and seriously set back any ambitious plans you might have had. And even if you do stay the course, you might find the journey much more stressful when you’re perpetually second-guessing yourself.
So if you’re curious about how to come up with an exit strategy, keep reading!
How do you decide when to sell your investments?
Unfortunately, I think deciding when to sell is the absolute hardest part of investing. On one hand, if you have a losing stock pick, ETF, or mutual fund in your account you’re probably worried about how much lower it can go. So will you cut your losses, or stay the course? And what if it rebounds higher after you sell?
On the other hand, deciding when to sell winning investment ideas is also a difficult decision. Do you take your profit? Or leave some money on the table with the hope your good fortunes will continue? What if it keeps going up after you sell?
These aren’t easy questions. And the answers are very likely to depend on your personal investing philosophy, risk tolerance and time frame. But at least by starting to be aware of these factors, you can begin to reflect on your specific selling options. So I strongly encourage you to think about the circumstances under which you’d sell.
This is especially true if you’re buying and selling individual stocks. In my experience, the biggest losses come from betting on a specific stock or company and riding it all the way to zero. So if you’re a fundamental investor, think about what data would need to change for your thesis to be proven wrong. And if you’re a shorter-term trader using technical analysis, decide where to put your stop-loss ahead of time.
Here’s another example: If you’re a buy-and-hold investor building a diversified portfolio for retirement, be very clear how much you need to accumulate before you’ll start selling down. And remember, this dollar amount can change in the case of a market drawdown. Thus you may need to adjust accordingly on the fly.
Plus, think about what other external circumstances could compel you to sell. What sort of family emergencies or unforeseen events would cause you to cash out your investments? Or what rate of return would you need to see from a hot real estate deal to liquidate your stocks and move to an alternative asset? By laying out these rules ahead of time, you should be less likely to make an expensive emotional mistake and sell at the wrong time.
As for me? In my case, as a trend-following investor I’ve written out a detailed plan for where to place my stop-loss order and how to adjust it over time. Then, in my longer-term retirement accounts, I’m happy to continually dollar-cost into diversified low-cost funds, rebalancing periodically to get back to my target allocations so long as my businesses are generating cash. Now, the key is just to stick with these good intentions!
Conclusion: The Right Time to Sell Is Up To You
As you can see, there are a variety of factors that go into deciding when you should your investments. So I encourage you to take some time to reflect on your personal situation and what exit strategies will work best for you. But whatever you do, just make sure you have a plan for when you’ll sell. And do it before you push that buy button! It’s the only way to consistently avoid the biggest investing mistake out there.
About the Author:
Jay Delaworth is an experienced trader, who specializes in blending fundamental analysis with technical trend following strategies to find actionable trading ideas. Visit IntelligentTrendFollower.com, where Jay publishes new breakout stock picks each weekend.