๐๐๐ซ๐ฎ๐ฆ ๐๐ฌ ๐๐ข๐ง๐ง ๐๐ซ๐ ๐ข๐๐ญ, "๐ ๐๐ก๐ฅ๐ครค๐ฎ๐๐" ๐ฆ๐ข๐ญ ๐๐๐ซ๐ฅ๐ฎ๐ฌ๐ญ ๐ณ๐ฎ ๐ฏ๐๐ซ๐ค๐๐ฎ๐๐๐ง
Time and time again I read here from users who have admitted to making a bad purchase (great), but don't want to part with it until they can do so at a profit (not so great). Why this is nonsense and bad purchases should be sold as soon as possible - no matter if in plus or minus - we will look at in this article. I'm talking in this post about Investment A, which you want to sell, and Investment B, which you want to buy.
๐๐๐ฅ๐๐ก๐ ๐๐ซรผ๐ง๐๐ ๐ ๐ข๐๐ญ ๐๐ฌ รผ๐๐๐ซ๐ก๐๐ฎ๐ฉ๐ญ, ๐ฎ๐ฆ ๐๐ข๐ง๐ ๐๐ง๐ฏ๐๐ฌ๐ญ๐ข๐ญ๐ข๐จ๐ง ๐ณ๐ฎ ๐ฏ๐๐ซ๐ค๐๐ฎ๐๐๐ง?
Certainly many. But here we mainly consider two situations:
1) A's investment case is no longer true. So, for example, there are new findings about a company in which an investment was made that significantly reduce the chances of return. Another example would be the investment in a sector ETF for which the growth prospects have deteriorated. Or personal preferences have changed, for example because the risk in the portfolio should be reduced. In short, the reason why you invested in A is no longer valid. You want to get rid of A because it no longer fits into your portfolio.
2) A new investment case B has emerged that fits better into your strategy. The investment case of A is still intact, but there is another investment opportunity that fits better into your portfolio. For example, because you, as a risk-averse investor, have so far invested in a blockchain ETF, @oliverplass but now GetQuin has shown you how you can easily hold Bitcoin yourself and you think that the chances of return are higher here.
So, purely rationally, an investment is reallocated because another investment promises more return or lower risk. As soon as you realize that, you should also reallocate.
๐๐ ๐ฌ๐๐ก๐จ๐ง, ๐๐๐๐ซ ๐ฆ๐๐ข๐ง ๐๐ง๐ฏ๐๐ฌ๐ญ๐ฆ๐๐ง๐ญ ๐ข๐ฌ๐ญ ๐ฃ๐๐ญ๐ณ๐ญ ๐ฌ๐จ ๐ฌ๐ญ๐๐ซ๐ค ๐ ๐๐๐๐ฅ๐ฅ๐๐ง, ๐๐๐ฌ ๐ฐ๐ข๐ซ๐ ๐ฌ๐ข๐๐ก ๐ฌ๐๐ก๐จ๐ง ๐ฐ๐ข๐๐๐๐ซ ๐๐ซ๐ก๐จ๐ฅ๐๐ง. ๐๐๐ซ๐ฎ๐ฆ ๐ง๐ข๐๐ก๐ญ ๐ง๐จ๐๐ก ๐ฆ๐ข๐ญ ๐๐๐ฆ ๐๐๐ซ๐ค๐๐ฎ๐ ๐ฐ๐๐ซ๐ญ๐๐ง, ๐๐ข๐ฌ ๐ข๐๐ก ๐ฐ๐ข๐๐๐๐ซ ๐ข๐ฆ ๐๐ฅ๐ฎ๐ฌ ๐๐ข๐ง?
Suppose you make the decision to shift from Investment A to Investment B due to higher returns. Then you assume that B will outperform A in the future. If you wait until you are back in the plus with A (if you ever get back in the plus with A), B has probably risen more than A in the meantime. At least that's what your investment case says. So compared to an immediate sale, if you wait and despite selling A at a profit, you can buy less B from your sale proceeds. Moreover, you have to pay additional tax on your profit from selling A, which means you can afford to buy even less B. If you had sold at a loss, no taxes would have been due. If that was too theoretical for you, there's also a calculation example a bit further down.
Let's assume you want to switch from investment A to a less risky investment B. E.g. because you need the money in the foreseeable future. In this case, it also makes sense to sell A directly and invest in B (in this case, it can also be the call money account), since A - due to the higher risk - could crash even further and you want more stability in the portfolio.
๐๐ฅรถ๐๐ฌ๐ข๐ง๐ง! ๐๐๐ก ๐๐ข๐ง ๐ฆ๐ข๐ซ ๐๐ฎ๐๐ ๐ซ๐ฎ๐ง๐ [insert any reason here] ๐ฌ๐ข๐๐ก๐๐ซ, ๐๐๐ฌ๐ฌ ๐ ๐ค๐ฎ๐ซ๐ณ๐๐ซ๐ข๐ฌ๐ญ๐ข๐ ๐ฌ๐ญรค๐ซ๐ค๐๐ซ ๐๐ฅ๐ฌ ๐ ๐ฌ๐ญ๐๐ข๐ ๐๐ง ๐ฐ๐ข๐ซ๐. ๐๐ง๐ญ๐ฌ๐ฉ๐ซ๐๐๐ก๐๐ง๐ ๐ฐ๐๐ซ๐ญ๐ ๐ข๐๐ก ๐๐ฎ๐๐ก ๐ง๐จ๐๐ก ๐ฆ๐ข๐ญ ๐๐๐ฆ ๐๐ฆ๐ฌ๐๐ก๐ข๐๐ก๐ญ๐๐ง.
If you're so sure here and wait, you're engaging in market timing. If you are good at it (which I don't think you are, or you wouldn't be in the red with A), you can speculate on it, of course. But then you should shift everything into A, because you know you will get an excess return with A. You don't want to do that? I thought so. Therefore sell A immediately and invest in B.
๐๐๐ก ๐๐ข๐ง ๐ง๐จ๐๐ก ๐ง๐ข๐๐ก๐ญ รผ๐๐๐ซ๐ณ๐๐ฎ๐ ๐ญ. ๐๐๐ฌ๐ญ ๐๐ฎ ๐๐ข๐ง ๐ฉ๐๐๐ซ ๐๐๐๐ก๐๐ง๐๐๐ข๐ฌ๐ฉ๐ข๐๐ฅ๐?
Clearly. Suppose A and B are each worth 100 euros on 01.06. You bought A for 110 euros and expect B to give you a higher return. We assume that you are right with your investment case and that B achieves a higher return than A. If you don't have a (sufficient) return, you can buy B for 110 Euro. If you do not have (sufficient) confidence in your investment case, this is a clear sign that you should look more closely at the two investments and the current market situation.
๐๐ณ๐๐ง๐๐ซ๐ข๐จ ๐: You wait until you are in the profit zone with A (115 Euro, to also recoup the fees) and then shift into B. A actually rises to the desired 115 euros by 01/12. So you sell A for 115 Euro, still have to pay taxes on the 5 Euro profit and get about 113.75 Euro. Since B, according to your investment theory, rises stronger, B has a value of 120 Euro at this time. You buy about 0.948 B from your 113.75 euros.
๐๐ณ๐๐ง๐๐ซ๐ข๐จ ๐: Again, you want to sell A for 115 Euros and then shift into B. However, A does not perform as you had hoped. On the contrary. On 01.12., the price of A is only 95 euros. Since B has risen to 120 euros in the meantime, you get nervous and switch at a loss. You do not have to pay any taxes and receive just 0.792 B for your 95 euros.
๐๐ณ๐๐ง๐๐ซ๐ข๐จ ๐: You sell A immediately and shift into B. You do not have to pay taxes. Since you are in the minus, you do not have to pay taxes and you also receive exactly 1 B for your 100 euros. On 01.12. you don't care about the price of A, the price of B is at the same time 120 Euro and you still have exactly 1 B.
๐๐ณ๐๐ง๐๐ซ๐ข๐จ ๐: You sell A for 115 euros. Even though B has a better return in the medium term, you catch a good moment and can buy B for 114.50 euros. Since taxes are due on your 5 euro profit, you receive 113.75 euros and buy 0.993 B from it.
So you see, even if A performs minimally better than B, you end up with more B and therefore more money if you sell immediately. In addition, you can certainly save yourself some nerve-costing glances at your portfolio, because you invest directly in B, the investment you believe in, and don't have to hope that A, the investment you no longer believe in, for some reason rises significantly more than B and you happen to catch the right moment to sell and buy. Also, you fill your loss pot and can save taxes should you sell another investment at a profit.
๐๐ง๐ ๐ฐ๐๐ฌ ๐ข๐ฌ๐ญ, ๐ฐ๐๐ง๐ง ๐ ๐๐จ๐๐ก ๐ฌ๐ญรค๐ซ๐ค๐๐ซ ๐๐ฅ๐ฌ ๐ ๐ฌ๐ญ๐๐ข๐ ๐ญ?
Of course, this is possible. Suppose A increases to 115 euros by 01.12. while B only increases to 110 euros. Then, after taxes, you can still invest 113.75 euros in B and could buy 1.034 B. However, this would contradict your well-analyzed investment case and would therefore be much less likely than a higher price gain for B. So you are betting against yourself. Sounds strange, but it is.
๐๐ค๐๐ฒ ๐จ๐ค๐๐ฒ, ๐ข๐๐ก ๐ก๐๐๐ ๐ฏ๐๐ซ๐ฌ๐ญ๐๐ง๐๐๐ง. ๐๐๐ฌ๐ญ ๐๐ฎ ๐ญ๐ซ๐จ๐ญ๐ณ๐๐๐ฆ ๐ง๐จ๐๐ก ๐๐ข๐ง๐๐ง ๐๐ข๐ฉ๐ฉ ๐รผ๐ซ ๐ฆ๐ข๐๐ก?
Yes! Going back to the math example: Imagine you had 100 euros at your free disposal. Would you then put these 100 euros into A or into B? Probably in B. So get the 100 euros by selling A and put them into B!
Have you ever held on to a bad purchase for too long or do you always sell immediately when the investment case no longer fits?