If your investments aren’t yielding the returns you hoped they would, you might be tempted to sell them and reinvest elsewhere. If things are going well, you may want to cash out and move on to the next investment. While changing strategies can be a good idea, it’s better to base those decisions on analysis and in the context of your long-term investment plan rather than on speculation or instinct. So, before you make an impulse move, ask yourself the following questions:
Have my financial needs/circumstances changed? When your financial goals change, so should your investment strategy. Likewise, you should re-evaluate your investment portfolio after significant life events, including when you’ve changed jobs, gotten a raise, had a child, or gotten married/divorced. Finally, consider your tax situation: If you’ve made gains on one investment, for example, there could be tax advantages to claiming losses on another.
Has my investment horizon or risk tolerance changed? If your financial timeline changes – as it does, for example, when you near retirement – your investment strategy will almost certainly need a tweak. Changes in how much risk you are prepared to accept should likewise trigger changes in your investments. In general, the shorter your investment horizon (i.e., the sooner you need the money) the less risky you want your investments to be. If your horizon is longer than 10 years, relatively higher-risk investments that offer the potential for higher returns, such as stocks, may be a good idea. If your time horizon is between two to 10 years, a mix of stocks and more conservative investments such as bonds may be best; and if it’s less than two years, you may want to consider some income-generating investments along with investments that tend to be lower risk. No matter what your timeframe, it is beneficial to discuss with your Financial Advisor what the most suitable investment mix is for your particular situation.
Are my investments under performing? When you have a long investment horizon, a bad day, week, month, or even year may not be a cause for concern – though it’s always wise to talk to a financial advisor about the performance of your investment portfolio. Consistent poor performance over the course of several years, however, is often a legitimate concern. To form your own opinion you may want to establish a benchmark to compare similar investments.
Are my investments outperforming? Apply a similar principle to investments that have performed extremely well. Talk to your Financial Advisor, determine why your investments are doing well, and decide what your next move should be. Try to avoid the temptation to make a quick profit, even if your stocks have gone up 100%, while still recognizing when a stock might be overvalued or when it might be time to trim the position. As a rule of thumb, unless there is a good reason to sell an investment, it may make sense to hold on to it for the long term, or at least for a period of five to 10 years.
Have my funds changed? If you’re invested in a mutual fund, look for changes in the fund’s manager, size, and composition. Changes can be good, bad, or neutral. The key is making sure that the fund continues to offer exposure to the assets that it outlines in its prospectus and that holding it continues to make sense in relation to your overall investment portfolio and financial objectives.
The bottom line: Investments aren’t impulse purchases. Before you change strategies, consider the pros and cons alongside your present circumstances and future goals. When you do – and you still want to buy or sell – you’ll know you’ve made an informed decision. For more on this topic, see the Financial Industry Regulatory Authority's article "Evaluating Investment Performance."
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Financial Industry Regulatory Authority (FINRA). “Evaluating Investment Performance,” 2015.
This information is provided for educational and illustrative purposes only.
Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors to determine how this information may impact your own situation.
Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses. The value or income associated with a security or an investment may fluctuate. There is always the potential for loss as well as gain.
Investing in mutual funds involves risk. The investment return and principal value of mutual funds will fluctuate, and shares, when sold, may be worth more or less than their original cost.
Investing involves risk, including the possible loss of principal. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially of investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original costs upon redemption or maturity.
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