We’ve written a decent amount about buying shares—how to buy them, what kind of shares you can buy, how shares work once you’ve bought them, and more. But there’s another side to that story. Someday, you’re going to want to sell your shares. You might sell them for more than you paid for them (a capital gain) or you might sell them to invest in something else after earning dividends for a while.
With this in mind, we thought we’d work through some of the things to think about before you sell.
Have you met your goals?
Investing should always have some kind of goal in mind. You might want to make a certain amount of money to invest in something else. This could be anything—a house, your retirement, your wedding, your children’s future...it’s up to you! Or your goal could be a commitment to invest for a certain amount of time (like 5 years). Or your goal could be based on a return—you might want to make a 10% return on your investment.
Goals don’t need to be complicated, and they’re useful for setting some clear “rules” as to whether you should sell or not. In many cases, you can quickly ask yourself: “have I met my goal?” If the answer is no, then it may not be time to sell.
Of course, that’s not the whole story...
Do you need the money?
Reality is, life gets in the way of all kinds of things, and investment is no exception. If you get an unexpected expense, you might need to sell some shares to cover it.
Don’t feel bad if this happens. It could happen to anyone. But make sure you’re truly in an emergency situation. Not all unexpected expenses are urgent—if you can put it off for a bit, and save up the money you need over time instead of selling your shares, you may end up better off in the long run. This is also a good reason to have an emergency fund, so that when something comes up, you can use your emergency account before you crack into your shares.
Having said that, if you’re at the end of your rope, then go ahead and sell some shares. There’s no shame in having to change your plans when something unexpected happens—and your Sharesies account will still be there, awaiting your return!
Have you thought about locking in a loss?
The share market can be a roller coaster, with lots of ups and downs. Locking in a loss is when you sell your shares for less than you paid for them.
This is a big cost of selling shares. The ups and downs of the share market only really affect you when you’re buying or selling. If you own shares that are worth less than you paid for them, you haven’t actually lost anything. But if you sell shares that are worth less than you paid for them, you’re locking that loss in for good. If the shares go back up in value after you’ve sold, you don’t get those gains.
Here’s an example: say you buy some shares for $100. The share market’s a roller coaster, and three months later, the price has dropped a bit and they’re worth $90. So you sell them, and walk away with $90 in cash—$10 less than you started with. Darn.
Then, three months after that, the share price goes up to $110. That’s great news for anyone who still owns shares, but it’s not so great for you, because you sold at $90. So make sure you think about whether it’s worth locking in a loss if you’re considering selling your shares for less than you paid for them.
What about missing out on growth?
Missing out on growth is similar to locking in a loss, but it’s a lot sneakier. Let’s say you bought some shares for $100, with the intention of sitting on them for a year. After 6 months, they’ve done really well—now they’re worth $150! You haven’t reached your time goal, but you figure a 50% gain is really good. So you sell. After all, you’re not locking in a loss, right?
Bad news: you sort of are. Because what if the share price keeps going up, and six months after you sell, it’s worth $175, or $200? This is not that different from locking in a loss—you’ve “lost” the potential to make a better return by selling earlier than you intended on selling.
The bottom line
When you put all these things together, you can see why we’re so keen on investing for the long term. The longer you can wait, the easier it is to avoid locking in a loss, missing out on growth, or not meeting your goals.
But things do come up sometimes, so if you are thinking about selling early, make sure you also think about the things we mentioned here. You might realise that selling your shares is more expensive than it looks!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.