Managing Your Investments – When To Hold On And When To Let Go

Maintaining a successful investment portfolio means knowing whether you should hold on to your investments, or whether you should let them go. Here’s how to decide.  

Investing is about managing your assets and your mindset, and a key part of that is knowing whether you should hold on or let go of certain investments. 

Aftarall, you don’t want to keep holding on to a hopeless investment, and neither do you want to sell your holdings at inappropriate times. 

Because the learning curve in investing can be steep and costly, here’s a guide to help you understand whether to hold on or let go of your investments, and the reasoning behind such decisions. 

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Understanding portfolio composition

Let’s start by understanding the importance of portfolio composition. 

The basis of successful investing lies in understanding how to compose your portfolio. Specifically, you’ll want to make sure your investment portfolio is diversified, which means being made up of several different investments that counterbalance each other.

Diversification is important because it lessens your level of risk. To understand how, let’s work through a simple example. 

Here are the share prices of two popular stocks — Netflix and Tesla — over the past 12 months. 

Now, here’s a table summarising a few possible investment outcomes.

Through this extremely simplified example, we can discern a few guiding principles. 

Firstly, it is highly risky to invest only in one stock. While at the time of writing, Tesla was up 35% and Netflix down by 59%, this is merely a snapshot of a particular moment in the market. No one from one year ago could have predicted this outcome, and the results could easily have been flipped, or different. 

Secondly, by splitting your investment over both stocks, you achieve a more moderate outcome. Yes, in our example, it so happens that we’re still down by around 12%. While this is not ideal, it is still far more preferable than being down by 59%. 

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Diversify to avoid an overly concentrated position

Of course, the best outcome is to be 100% invested in Tesla and be up by 35%, but once again, how could you have known if this would indeed happen? You couldn’t, so the next best thing is to spread your investments across multiple promising candidates.

This principle of not putting all your eggs into one basket allows you to avoid having overly concentrated positions in your portfolio — such as being all in on one or a few stocks, or having all your money in one sector, such as tech, or healthcare, or real estate (remember 2008?)

Hence, a truly diversified portfolio should contain investments that carry opposing risks, and should have several different lines of diversifications, such as (but not limited to):

• Equities and stocks
• Bonds and cash
• Geography
• Industry
• Market capitalisation

Aa a rule of thumb, a diversified investment portfolio should have a bit of everything from everywhere. 

But it’s not a free-for-all. How many different investments to include, and the proportion each should occupy is also important, and should be aligned with your goals, preferences and risk appetite.

All that is another article altogether, but we’ll mention one more thing.

Diversification is not a one-and-done type of deal — you’ll need to review and rebalance your portfolio regularly to maintain control of your risk. This means that you will be adding and removing your investments as you adjust your portfolio.

Now, removing investments is just as important as adding them, but how do you know whether you should hold on to a particular investment, or sell it off and let it go? 

Well, that brings us to the next part of this article.

Related to this topic: So You Have a Messy Investment Portfolio. Here’s How You Can Clean it Up

When to hold on to your investments

When the company has yet to reach its full potential 

If the company you have invested in has yet to reach its full potential, selling off your shares early means missing out on a huge payoff. 

And that could potentially be a very expensive mistake — just ask anyone who sold their Amazon shares in March 2020 (that’s when share prices dipped slightly, then nearly doubled mere months later).

So, just because some of your investments aren’t performing up to expectations doesn’t mean they should automatically be removed from your portfolio. They could simply have yet to live up to their potential*.

(*As per the professional opinion of analysts and experts, not the unhinged ranting of some random TikTokker!)

When selling would result in a loss

The value of your portfolio may go up and down with the market, but any profit or loss is only realised when you exit your position. That’s to say, even though a certain investment may be down 20% today, you haven’t actually lost any money yet. You only take the loss at the point you sell your investment. 

Hence, you should hold your investment when selling would result in a loss, so as to give the price a chance to recover. This is especially so, if there are no pressing reasons to offload your investment, such as an urgent need for money, or upheavals in the market. 

When dividends have not been fully paid

Government bonds and other fixed-income investments pay dividends over a set period of time (that’s what fixed-income means). 

While you are free to sell your bonds to another investor, doing so early will cause you to lose out on the dividends that are yet to be paid. 

Your losses could also be exacerbated by the way the dividends are structured. For example, Singapore Savings Bonds pay less dividends during the initial few years, and more dividends towards the end of its tenure. 

So if you want to earn the full amount of dividends, you’ll need to hold your investment to the end.

When to let go of your investments

When your risk tolerance has been exceeded

It is important to be clear-eyed and disciplined when investing, and part of that is determining your risk tolerance level. 

Investing according to your risk appetite will help you feel more confident and assured in your portfolio. However, once an investment starts displaying attributes that make it more risky than you’re comfortable with, you are likely to start getting stressed out. You may even panic and start making mistakes, which will most certainly set you back in your investment goals. 

Selling off investments that have become too risky for your taste may prove to be the more prudent decision. 

When the stock price hits a target 

Another way to deal with volatility in the market is to set price targets, and sell your investments when the targets are reached. Doing so allows you to exit your position in a controlled manner, allowing you to walk away with the gains you have made. 

Without a price target, you may be tempted to hold on to your investment for an even bigger profit. However, predicting the top is notoriously difficult, and should prices fall back down, you would miss your chance of making a profit. 

You can choose to exit your position all at once at a particular price target, or set several price targets and gradually offload your investment along the way. 

When there are negative changes in the company

A company may undergo changes which negatively impact its share prices. This may not matter much if the impact is short-lived, but if the changes prove (or are believed to be) long-lived, unwinding your position may be wise. 

Other developments may also cause you to sell your investment; for instance, a change in ownership to an entity involved in an industry or with values you oppose, or if there are clear signs the company can’t keep up with the competition, or simply a prolonged period of declining performance.

This also means that as an investor, it is important to keep up with what’s going on in the world around you. 

When there’s a market selloff

During a market downturn, a common reaction among investors is to start selling their investments. 

This doesn’t mean that everyone is dumping their stocks and shares and hiding piles of cash under their beds. Investors simply move from more risky assets to less risky ones, focusing on what are known as ‘safe haven assets’.

One of the most popular examples of such assets is gold, while silver has its own fans too. But that doesn't mean only shiny metal can be considered as safe haven assets. 

You see, what makes an asset a safe haven is the ability to retain its value no matter what’s going on in the markets. Hence, a precious metal like gold is a logical and obvious example — its price remains the same (or even increases) as stocks and commodities crash. 

But other assets can also retain their value in a market downturn, and can act as safe havens for investors too. Some of these include government bonds, certain currencies, and even art. 

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