Know when to Exit Investments

Investors often exit investments for the worst of reasons and keep horrible investments. It is important that you know why and when you should exit investments. This is just as important as knowing when to purchase since it helps you avoid losses and errors in advance. However, this requires an upkeep of knowledge on the financials of the firms you’ve invested in, which you should be doing anyway, as opposed to watching stock charts and graphs or moving on rumor. It also requires being aware of developments that could potentially ruin the fundamentals of the firm. The primary reasons you should sell a stock is if the company’s financial fundamentals are reversing. This means if you are seeing the following: decreasing revenue, decreasing profit margins, decreasing cash flow from operations, increasing operational costs, increasing long-term debt, or decreasing retained earnings… it may be time to exit the company’s holdings.

Firms with decreasing fundamentals have no place in your investment pool, you can always do something better with the money. It is always wise to shift capital from an investment in a firm with decreasing or poor fundamentals to firms that have improving financials which are better for your long-term return. You should always replace potential loss with potential gain. This applies if you’ve made an investment and mistakenly judged the financial fundamentals of the company. This applies if you have misjudged the fundamentals, management, or strategy of the firm you should sell. If the reality is significantly worse than you believed it to be, don’t make the mistake of trying to retain the firm in your investment holdings expecting the situation to improve.