𝐖𝐚𝐫𝐮𝐦 𝐞𝐬 𝐒𝐢𝐧𝐧 𝐞𝐫𝐠𝐢𝐛𝐭, "𝐅𝐞𝐡𝐥𝐤ä𝐮𝐟𝐞" 𝐦𝐢𝐭 𝐕𝐞𝐫𝐥𝐮𝐬𝐭 𝐳𝐮 𝐯𝐞𝐫𝐤𝐚𝐮𝐟𝐞𝐧
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.
𝐖𝐞𝐥𝐜𝐡𝐞 𝐆𝐫ü𝐧𝐝𝐞 𝐠𝐢𝐛𝐭 𝐞𝐬 ü𝐛𝐞𝐫𝐡𝐚𝐮𝐩𝐭, 𝐮𝐦 𝐞𝐢𝐧𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐭𝐢𝐨𝐧 𝐳𝐮 𝐯𝐞𝐫𝐤𝐚𝐮𝐟𝐞𝐧?
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 In short, the reason why you invested in A is no longer valid.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.
𝐉𝐚 𝐬𝐜𝐡𝐨𝐧, 𝐚𝐛𝐞𝐫 𝐦𝐞𝐢𝐧 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐢𝐬𝐭 𝐣𝐞𝐭𝐳𝐭 𝐬𝐨 𝐬𝐭𝐚𝐫𝐤 𝐠𝐞𝐟𝐚𝐥𝐥𝐞𝐧, 𝐝𝐚𝐬 𝐰𝐢𝐫𝐝 𝐬𝐢𝐜𝐡 𝐬𝐜𝐡𝐨𝐧 𝐰𝐢𝐞𝐝𝐞𝐫 𝐞𝐫𝐡𝐨𝐥𝐞𝐧. 𝐖𝐚𝐫𝐮𝐦 𝐧𝐢𝐜𝐡𝐭 𝐧𝐨𝐜𝐡 𝐦𝐢𝐭 𝐝𝐞𝐦 𝐕𝐞𝐫𝐤𝐚𝐮𝐟 𝐰𝐚𝐫𝐭𝐞𝐧, 𝐛𝐢𝐬 𝐢𝐜𝐡 𝐰𝐢𝐞𝐝𝐞𝐫 𝐢𝐦 𝐏𝐥𝐮𝐬 𝐛𝐢𝐧?
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.
𝐁𝐥ö𝐝𝐬𝐢𝐧𝐧! 𝐈𝐜𝐡 𝐛𝐢𝐧 𝐦𝐢𝐫 𝐚𝐮𝐟𝐠𝐫𝐮𝐧𝐝 [insert any reason here] 𝐬𝐢𝐜𝐡𝐞𝐫, 𝐝𝐚𝐬𝐬 𝐀 𝐤𝐮𝐫𝐳𝐟𝐫𝐢𝐬𝐭𝐢𝐠 𝐬𝐭ä𝐫𝐤𝐞𝐫 𝐚𝐥𝐬 𝐁 𝐬𝐭𝐞𝐢𝐠𝐞𝐧 𝐰𝐢𝐫𝐝. 𝐄𝐧𝐭𝐬𝐩𝐫𝐞𝐜𝐡𝐞𝐧𝐝 𝐰𝐚𝐫𝐭𝐞 𝐢𝐜𝐡 𝐚𝐮𝐜𝐡 𝐧𝐨𝐜𝐡 𝐦𝐢𝐭 𝐝𝐞𝐦 𝐔𝐦𝐬𝐜𝐡𝐢𝐜𝐡𝐭𝐞𝐧.
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.
𝐈𝐜𝐡 𝐛𝐢𝐧 𝐧𝐨𝐜𝐡 𝐧𝐢𝐜𝐡𝐭 ü𝐛𝐞𝐫𝐳𝐞𝐮𝐠𝐭. 𝐇𝐚𝐬𝐭 𝐝𝐮 𝐞𝐢𝐧 𝐩𝐚𝐚𝐫 𝐑𝐞𝐜𝐡𝐞𝐧𝐛𝐞𝐢𝐬𝐩𝐢𝐞𝐥𝐞?
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.
𝐒𝐳𝐞𝐧𝐚𝐫𝐢𝐨 𝟏: 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.
𝐒𝐳𝐞𝐧𝐚𝐫𝐢𝐨 𝟐: 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.
𝐒𝐳𝐞𝐧𝐚𝐫𝐢𝐨 𝟑: 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.
𝐒𝐳𝐞𝐧𝐚𝐫𝐢𝐨 𝟒: 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.
𝐔𝐧𝐝 𝐰𝐚𝐬 𝐢𝐬𝐭, 𝐰𝐞𝐧𝐧 𝐀 𝐝𝐨𝐜𝐡 𝐬𝐭ä𝐫𝐤𝐞𝐫 𝐚𝐥𝐬 𝐁 𝐬𝐭𝐞𝐢𝐠𝐭?
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.
𝐎𝐤𝐚𝐲 𝐨𝐤𝐚𝐲, 𝐢𝐜𝐡 𝐡𝐚𝐛𝐞 𝐯𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝐞𝐧. 𝐇𝐚𝐬𝐭 𝐝𝐮 𝐭𝐫𝐨𝐭𝐳𝐝𝐞𝐦 𝐧𝐨𝐜𝐡 𝐞𝐢𝐧𝐞𝐧 𝐓𝐢𝐩𝐩 𝐟ü𝐫 𝐦𝐢𝐜𝐡?
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?