How to manage your investments

When is the right time to sell your investment? It’s a simple question with a sometimes complex answer. But in the end, it comes down to how much growth is enough.

Remember, you only realise a profit or loss once you sell your holdings. And in order to work out how much an asset has grown, you’ll need to take several factors into account, including how much you put up for it.

Some investments can be decades old, and your portfolio could contain several assets at a time. This makes it impossible to remember how much each of them cost at the time you bought them.

Over this period, you could’ve also taken several actions you won’t easily remember. For example, maybe you sold some of your holdings in an underperforming stock. Perhaps you reinvested—or even withdrew—some dividends. Suddenly working out how profitable an investment is becomes complex.

In addition to your investment strategy, preferably one for each account, you should have a complete record of all your actions. Luckily, most online brokers keep a log of all your interactions with your portfolio in your profile. So you can always refer back to your history for any information you need.

Living off your investment

For some, investing in the markets offers an alternative or addition to traditional retirement funds. If your investment portfolio is your nest egg, you’ll have to sell your assets for cash to fund your lifestyle. However, this has implications for your future earnings and tax liability. That’s why it’s advisable to sell your investments gradually.

‘Drawdown’ is a term typically used in pension funds to describe the rate at which you withdraw funds from your retirement savings. In this case, we’ll use it to mean selling parts of your portfolio over time to cover your living expenses.

Your drawdown rate is usually expressed as a percentage of your portfolio’s total value. For example, if your portfolio is worth £400,000, and you need £40,000 per year to cover your costs, your drawdown rate is 10%.

A high drawdown rate will result in you running out of money. And if it’s low enough, you’ll have enough in your portfolio to continue growing your funds over time. Working out your ideal drawdown rate depends on two factors:

• Your portfolio growth rate
• The rate of inflation

A safe drawdown rate is usually the amount of growth above inflation your portfolio had in the previous year. For instance, if the rate of inflation was 3%, and your portfolio grew by 5%, you could withdraw 2% of your wealth without making a dent in it. Your remaining money would continue to grow in value and earn dividends. But if your portfolio only grows by 3% and inflation is 3%, any amount you withdraw would make an impact.

What makes this especially tricky is that inflation isn’t reflected in your portfolio. While you can see your money growing, you can only feel the impact of inflation when you withdraw and spend it. That’s why it’s important to account for it in your planning.

When you consider drawdown rates, it becomes easier to calculate how much growth is enough for you.

Selling to rebalance

If you’re managing your own portfolio using a clear strategy, you might have to sell some shares in an investment that grew too much. This sounds like a good problem to have, and rebalancing is controversial for that reason. But if you want to maintain your initial risk profile, you may need to do this.

Remember, each transaction incurs a cost and sometimes a tax liability. Rebalancing should be done with a clear purpose.

Cutting your losses

No one goes into an investment thinking it’ll depreciate. But it’s an unfortunate reality of investing; not every company makes it. Deciding to sell can be hard, especially if you had high hopes for your investment. But selling a loser, or an asset that’s devaluing, could benefit your portfolio in the long run.

Share prices don’t typically depreciate in a straight line. They can fall, recover, fall further, recover a little and keep doing that dance for years. Those small recoveries can give you false hope about an asset’s future. But analysing the market, or following expert analysis, could help paint a clearer picture about its future.

Always remember that your investment portfolio is bigger than just one holding. Once an asset hits your exit price, sell and invest in one that has better prospects.