4 Considerations for Exiting an Investment

There are many reasons investors may want to divest. Selling investments during a downturn due to an emotional response may mean missing out on long-term profits. However, holding onto a falling stock could also carry a risk. Additionally, investing for a goal generally means the investor must eventually divest to reach that goal.

Investors may navigate this more easily with a clear exit strategy, ideally created well before the divestment opportunity. Investors who stick to their exit strategy may be able to avoid emotional trading and align with their long-term goals.

As mentioned above, investing for a goal means the investor will generally eventually have to divest to reach the goal. If the investor has a long-term horizon for their goal, they may consider placing trailing stop orders on some securities while staying the course on others. Placing a trailing stop order could potentially help manage risk.

Investors with a short-term goal may not have the same risk tolerance because they need to exit the investment sooner. Instead, they may consider setting up stop-loss prices.

See more: A Guide to Different Order Types: Market, Limit & Stop Orders

Investors will need to define what an unacceptable level of loss is for their portfolio. Setting this type of risk limit may help determine the length of ownership of an investment and the type of stop-loss order to use.

More conservative investors might opt for limit orders set close to the security’s price, which may help decrease exposure to sudden changes in price.

Investors may want to consider defining a price at which they will have made enough profit and would be willing to sell (either the entire position or a portion of it). Setting a price at which to exit may help remove emotion from a difficult decision, helping investors sell at a time that helps them reach their goals.

Portfolio weights will change over time as some investments may perform better than others. The investments that perform well or that underperform cause the weights within the portfolio to deviate from the original asset allocation.

As a portfolio’s asset allocation changes, so does its risk profile. To return the portfolio to the desired risk profile, an investor may need to sell some of the successful investments and reallocate funds to the lower-performing investments. Buying and selling assets to restore the portfolio’s desired asset allocation is called rebalancing.

While rebalancing may sound counterintuitive, returning a portfolio to its desired asset allocation can potentially enhance risk-adjusted returns for investors.
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