Page 118 - July 2022

FINANCIAL PLANNING
WHEN
TO
EXIT AN
INVESTMENT by Cade Peterson, Financial Advisor
With volatile markets especially, investors
often question whether or not they should exit an investment. Maybe you don’t think
there is enough upside, or maybe you think
the market is going to crash. When to exit an investment is an important decision to make
as an investor. We can relate this to life as a horse owner – a business that is full of ups and downs. If your horse isn’t performing like you originally hoped, maybe it’s time to sell or go
a different direction. Two things that equity investors and horse owners have in common is the difficult decisions they must make. Who should I use to train my horses? What financial advisor should I use? What races do I want to pay into? What should I invest in? The list goes on. In this article I want to talk about when it might be wise to exit an investment.
We are currently in a bear market. In the first quarter of 2022, we had negative GDP (gross domestic product) growth (U.S. Bureau of Economic Analysis), meaning the U.S. economy had negative growth. If this happens for two consecutive quarters, we are considered to be in a recession. I personally believe that a recession is likely. Gas prices are at an all time
high, food prices continue to rise, and inflation is at a 40-year high. Placing blame on Putin and Covid-19 isn’t the answer to inflation, although they are most certainly factors that have affected the inflation rate in the United States. Several trillion dollars were infused into the economy after it was shut down, and we saw expected growth after this as it was meant to stimulate the economy and get it back to the level it was at prior to Covid. But we now have food and gas prices at levels much higher than they were last year. All of these volatility events have caused the market to react accordingly. Major indexes are down double digits year-to- date, and it has left investors wondering if they should liquidate their investments and move
to cash.
For advisors, this is a conversation we have
time and time again during these periods.
So, at what point is exiting an investment a wise decision? There are several factors that come into play with this decision. A big part of it is “looking under the hood,” as I say. Taking a look at the company’s management, their business plan, if they are profitable, and past performance of the stock are all great indicators that can lead to a justified decision.
DIVERSIFICATION
If you are an investor, you’ve likely heard the term “diversification.” This is a way to reduce unsystematic risk when investing. If you are diversified, you likely own a variety of different stocks, bonds, and mutual funds of all shapes
and sizes. This is a very important factor when considering if you should sell an investment. Let’s say you have 100 different holdings. If one of those companies goes bankrupt, it’s
not going to ruin your portfolio. This is the protection of being diversified. You will still have 99 different holdings which are hopefully experiencing some growth. Having a financial advisor can be instrumental in keeping an
eye out for investments that need to be sold. Compare this to your horse trainer telling you that a horse you have isn’t going to perform the way you’d like. There’s a chance they are wrong, but they are the experts in their field, and it’s usually wise to take their advice.
WHEN TO ENTER AN INVESTMENT
I don’t want to give off the wrong idea with the title of this article. If you see a stock you own underperforming, that doesn’t mean you should always jump out of the boat and sell. We are in a bear market right now. That means the stock market has dropped
at least 20% from its previous high. Some investors get very concerned when they see
a drop in value in their account and think
it’s time to sell. A bear market or a recession doesn’t mean all of the companies you own are going out of business. This is a common misconception. Companies are very resilient, and they learn to adapt to policy changes and events that cause a shock to the market. I want to explain my reasoning here with a chart from my friends at First Trust.
116 SPEEDHORSE July 2022