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Investments

When Should You Sell an Investment?

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Selling an investment can be more difficult than buying one for many investors. When you buy an investment, you obviously have high hopes for how well that investment will perform. Unfortunately, it’s unlikely that every investment will meet your expectations. In that situation, holding on to your investment essentially means that you are not putting that money to its best use. Here’s a brief look at some of the signs that may indicate it is time to sell.

Changes in Investment Value

Experienced investors often establish a specific price target for an investment at the time they buy it. They also establish just how much of a decline from their purchase price they are willing to accept. If the security hits one of these two numbers, they sell. You may benefit from doing something similar. Decide on a percentage gain that you want from a particular investment and sell when it hits your target. Likewise, determine how much of a decline in the price of a security you are willing to accept and sell when the price falls to that target number.

An Investment’s Underperformance

You may opt to buy a specific investment because you have certain expectations for that investment. For example, you may buy stock in a company that you believe has a technology that is superior to anything currently available and has enormous potential for future profits. Or, you may buy a mutual fund* with a track record of strong long-term returns that you are optimistic will continue.** Short-term fluctuations in price are normal in investing. However, if you own stock in a company that loses money year after year or own shares of a mutual fund that consistently underperforms its benchmark index, selling may be the wiser option.

A Shift in Your Risk Tolerance

Your ability to handle the potential for losing some or all of your money in an investment is known as your risk tolerance and influences the types of investments you buy. You may find that, at some point, the risk level of an investment you own no longer matches your risk tolerance. It could also happen that your risk tolerance changes when, for example, you move closer to retirement. You may choose to sell an investment so that the asset allocation you have is more in line with your current situation.***

You Identify a Need to Rebalance Your Portfolio

Your investment portfolio may become unbalanced over time as some asset classes outperform other asset classes. When it gets to the point when one asset type comprises a larger or smaller percentage of your portfolio than you intended when first devising a suitable asset allocation, then you may consider selling some investments to rebalance your portfolio.

Determining when the time has come to sell an investment can be a tough decision. Emotions, fear of missing out, and other factors can cloud your judgement. That’s why the input of an experienced, objective financial professional can be so helpful in making investment decisions.

*You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

**Past performance does not guarantee future results.

***Asset allocation does not guarantee a profit or protect against loss.

Rating Bonds

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US Savings Bonds. Savings bonds are debt securities issued by the U.S. Department of the Treasury. They are issued in Series EE or Series I.Before you add bonds to your portfolio, you should understand how they work and what variations exist among them. Just as importantly, you need to identify the risks that come with owning bonds and how you can protect yourself from them.

Bond Basics

Bonds are essentially IOUs, issued by federal, state, and municipal governments as well as by corporations and governmental agencies. They are intended to raise revenue for a wide variety of activities. For example, governments issue bonds to finance the construction of infrastructure projects, such as roads, bridges, airports, public housing, and schools. Corporations may use the proceeds of bonds to pay for the construction of new manufacturing facilities, research and development, or to expand into new markets.

Bond investors essentially loan money to the bond’s issuer. In return, they receive interest payments at specified intervals plus a promise that the issuer will return the bond principal to investors when the bond’s term ends on its maturity date.1

Interest Rate Risk

Bonds are not a risk-free investment. Rising interest rates may reduce the desirability of the bonds you own because there is an inverse relationship between bond prices and yield. If you opt to sell a bond before it matures because interest rates on newly issued bonds have gone up, you will most likely have to accept a lower price than you paid for it.

The Importance of Credit Quality

Credit risk — or the risk that a bond issuer will fail to make promised interest and principal payments — is another important consideration. Bonds issued by companies or entities that are financially healthy are not as risky as bonds from issuers that are less financially sound. Bonds with low credit ratings offer higher yields to compensate for added risk to your portfolio.

Rating Agencies

Rating services assess municipal bonds, all types of corporate bonds, and international bonds. U.S. Treasury bonds are not rated. Before rating a bond, analysts assess various factors that could affect the issuer’s willingness and ability to meet its obligations to bondholders. For example, they examine other debt the company carries and how fast the company’s revenues and profits are growing. They take a holistic approach in that they also review the state of the economy and the financial health of other companies in the same business. In the case of municipal bond issuers, they examine and compare municipalities of a similar size and similar budget.

Credit ratings influence the interest rate an issuer must pay in order to sell its bonds. However, credit ratings are opinions about credit risk. Even though credit ratings are forward looking in that they assess the impact of foreseeable future events and can be useful to investors, they are not a guarantee that an investment will pay out or that an issuer will not default. While investors may use credit ratings in making investment decisions, they are not indicators of investment worth nor are they buy, sell, or hold recommendations. You can learn more about the rating systems of the two major services, Standard & Poor’s and Moody’s, on their websites.

This information is not meant as tailored investment or tax advice. Before building a portfolio that includes bonds, you may find it helpful to discuss your strategy with a financial professional.

1Bonds can gain or lose value based on economic conditions and market events. Principal is not guaranteed.

Understanding Total Return

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Hands of a young Asian businessman Man putting coins into piggy bank and holding money side by side to save expenses A savings plan that provides enough of his income for payments.A mutual fund’s performance — its total return — can be either positive or negative. In other words, a fund either made or lost money for a measured time period. There are three separate elements that contribute to total return: the distribution of fund income (interest and dividends received on the fund’s investments); the distribution of capital gains; and the rise or fall in the price of fund shares. A fuller understanding of these three elements can help you make more informed decisions as an investor.

Fund Income

Bond issuers, such as corporations and the U.S. government, pay interest on the money loaned to them by the investors that buy the bonds. If you buy a government bond, for example, you know how much interest the bond will pay you over the life of the bond. Bonds are also known as “fixed-income” investments because you can anticipate your earnings.

If you own shares in a bond fund rather than an individual bond, you will share in the interest earned by the bonds in the fund. However, if you own your bond fund through an employer’s retirement plan, you do not actually receive your share of the interest income in cash. Instead, your share of the interest is reinvested in the fund and is used to buy additional shares for your account.

If you own shares in a stock fund, you may receive a distribution of dividends the fund received on its various stock holdings. Your share of the dividends paid to a stock fund you own through an employer’s retirement plan is reinvested in that fund and used to buy additional shares.

Capital Gains Distributions

When fund managers sell an investment that has increased in price, the fund will have a capital gain. Funds, of course, have losers as well as winners. When a fund sells an investment for less than it paid for it, the fund suffers a loss. Most mutual funds distribute capital gains (minus capital losses) to their shareholders at the end of the year. If you own funds through a retirement account, then the capital gains distributions are reinvested in additional fund shares.

Rise or Fall in Fund Share Prices

The market prices of stocks and bonds rarely remain static — they typically rise and fall each trading day. Thus, the share price of a fund depends on the current value of the investments it holds in its portfolio, after deduction of expenses and liabilities. As an investor, it’s important to understand that until you sell your shares in a fund, any gain or loss in their value is only a gain or loss on paper.

Total Return and Fund Performance

There are several ways to measure fund performance, and total return plays a part in each method.

  • Average annual total return: One way to measure the performance of a mutual fund is to look at its average annual total return for different periods of time. A comparison of a fund’s return to a benchmark will show how the fund has performed relative to an index.
  • Cumulative total return: Looking at a fund’s cumulative total return shows how much a fund has earned over a specific period.
  • Year-by-year returns: It can be helpful to compare a fund’s performance from one year to the next. If you notice a wide variation year to year, the fund is most likely a highly volatile one.

You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

Prices of fixed income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.

Stock investing involves a high degree of risk. Stock prices fluctuate and investors may lose money.

Does Your Risk Tolerance Need a Realignment?

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Investor information graph. Careful forex trader make money revenue, sell stock indicator with diagram profit information crypto analysis professional marketing vector illustration of investment graphMarket volatility. A change in your time horizon. Different goals. All these things can affect the amount of risk you feel comfortable taking with your investments. Your ability to tolerate risk influences the investment choices you make and may have a significant impact on your success in achieving your financial objectives. Periodically revisiting your risk tolerance is an important step in the portfolio review process.

A Moving Target

Your feelings about risk may change depending on what the markets are doing. During a prolonged period of market volatility, you may find your comfort level dropping, even if you previously thought you had a high tolerance for risk. If you’re a conservative investor, an extended market upswing may have the opposite effect, encouraging you to take on additional investment risk. In either case, basing investment decisions on market behavior instead of a well-thought-out investing strategy isn’t the best plan. Instead, take time to reassess your feelings about risk. If they’ve truly changed, adjust your strategy going forward to reflect the changes.

More Than a Feeling

How much money could you afford to lose if investment values dropped significantly? Your ability to accept risk also depends on your financial circumstances and your time horizon for tapping your assets. If investment losses would leave your finances in jeopardy and you have a relatively short time frame before you’ll need your money, your capacity for taking risk may be limited. Make sure you consider your risk capacity in your review.

A Realistic View

A long period of either strong or weak market performance may convince you that the current trend will continue indefinitely. Perceived risk is how much risk you think an investment holds. However, your perception of an investment’s risk might not match its actual risk. In that case, you could be taking more or less risk than you should to remain within your comfort zone and still reach your goals.

Your financial professional can help you reassess your risk tolerance along with the level of risk in your portfolio.