Do you have a stinker investment in your portfolio? Trying to figure out if now is the time to apply the portfolio Lysol? I recently got this question from a friend of mine. He wanted to know how you know when to dump poor performing investments.
It may be very tempting to get rid of lousy performing investments right away. However, here are a few things you might want to think about:
Why did you buy the investment in the first place?
Are your reasons for owning the investment still valid? Is this just a temporary performance issue or has this investment really lost it’s mojo? Hopefully, you didn’t buy it because of a hot tip, and you did your homework to begin with. Just like furniture in your home, when you add an investment to a portfolio it needs to serve a purpose. Don’t invest just to “make money“, have a goal. Was the investment for income, growth or both? Think back on your reasons for buying in the first place. If things have changed, it may be time to say adios.
How much is the investment costing you?
I’m talking about internal fees as well as opportunity cost here. First, let’s talk about opportunity cost. When looking at an investments performance you should compare it to similar investments in its asset class. Past performance is no indicator of future gains. (Don’t yawn here! I had to say it.) You don’t want to buy an investment that is costing you in terms of performance by lagging its peers over years. Looking at an investment over longer cycles and comparing 3 and 5 year returns should be sufficient. Usually an investment with low fees and low turnover have stronger performance.
Could selling the investment give you some tax benefits?
Even if the investment still fits into your portfolio, you know why you bought it, and it’s not expensive, you may want to sell it anyway. Maybe. If it’s in a taxable account and has lost money, you could sell and use the losses to offset other taxes. No cap gains to offset? You can still deduct up to $3,000 of losses and carry the remainder forward in future years.
So you can see, the decision to sell an investment involves quite a bit more decision process than just losing money. If the investment has gone down, could this be a buying opportunity? Do you have an investment you are thinking of dumping and need some advice? Write me at firstname.lastname@example.org, or call me at 859-225-2596.