Know When To Exit The Wrong Investments

_“The most important thing to do if you find yourself in a hole is to stop digging” _– Warren Buffett.

Investment decisions can go wrong. Many behavioural biases can lead to mistakes while making an investment decision. When you realise you invested erroneously, have an exit strategy for such investments. Be it stocks, mutual funds, insurance, or other investment types. Investing mistakes can only dilute your portfolio return. Hence, it is vital to review your portfolio from time to time and get rid of unsuitable investments. Let’s look at the instances to exit when you main investments.

When Should You Exit Your Investments?

Consistently underperforming investments

When it comes to market-linked investments like stocks and mutual funds, a consistently underperforming investment that cannot deliver the expected return and keep pace with the benchmark can hamper your portfolio growth. Stocks are risky assets. Especially when your investments are purpose-driven, it is important to analyse the reason for consistent underperformance. If it is a direct equity investment, sell the stocks of the company that are fundamentally weakening. If the company is fundamentally strong and sound, there is a potential for the stock to perform well in the long-term/future, even if undervalued today. Hence, exit from fundamentally weak stocks. You can also take the help of an expert or financial advisor to make an exit decision to cut down potential losses.

Better investment opportunities

Financial awareness is growing, and investors are exposed to various financial products available in the market. Hence, you can start looking for better opportunities when you realise your investment mistake. It is vital to take corrective actions before the loss worsens. Make a cost comparison and choose wisely. Do not forgo a great investment opportunity by holding on to the detrimental investment.

Financial goal compromised

When the investment is not delivering the expected return, your financial goal is compromised. Suppose you have invested with a long-term perspective of earning 12% to 14% compounded growth annually to achieve your particular financial plan five years ahead. You realise your investment is delivering 4% lower than the expected return; it is better to exit promptly and invest in a better investment to help you reach your financial goals. When you retire early from an unsuitable investment, you can reduce its negative repercussions and invest in a better alternative to maximise growth with time.

Final word

Don’t be unnerved by your investing mistakes. Know how to circumvent the economic unpredictability. Discipline your investment process. Invest in a known business. Before investing in the market, undertake a fundamental, technical and qualitative study of the market and its investment opportunities. Do a periodic review, monitor, and rebalance the portfolio to weed out the wrong investments.