Buying and selling, holding and folding

by Listener Archive / 02 June, 2012
If you don’t get the basics right, it can be hard to make your investments pay off.
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It might seem odd starting a personal investment column talking about when to sell. But the first law of investment is that what you buy you will ultimately sell. When you buy a house, you will sell it again – probably within a decade, based on real estate industry figures. Life circumstances change – you get a new job in a different area, your relationship ends, you decide where you are living no longer suits your needs or you feel like something new. So, whether you are an experienced, active investor or new to the game, there are two things you need to ask yourself when deciding where to put your money:

  • What you want from the investment – income, or capital gain, or both?

  • When are you likely to want or need to sell?

When you decide to buy a house, you evaluate whether it fits your requirements – can you afford it, is it in the right area for you, does it have the right spaces, etc? However, few people actually find the perfect house and instead plan to adapt it. So they make the decision to buy by balancing the pros and cons. Most investments involve similar trade-offs, such as risk vs return, and income vs capital gain. For a house, one of those considerations is how saleable it is. Fashions and expectations change. For example, two bathrooms are now routine and busy families might regard a large garden as a curse rather than a blessing. A generation ago, two bathrooms were a luxury, and large gardens common. So, when you buy a house, you should ask yourself what features are sought after; how easily will your house sell?

It’s no different when you buy any other investment, whether it’s shares, fixed interest such as bonds, or something like antiques. Remember for tax purposes, a capital gains tax applies only if you are a trader. The Inland Revenue will not tax gains on New Zealand investments unless they are part of a trading activity or where you buy them with the dominant purpose of disposal. The premise on which the IRD operates is that you buy investments to hold. Deciding whether you are a trader hinges on how quickly and how often you sell. The key decision any investor has to regularly evaluate is the ongoing potential of the investment. Is it better to sell, buy or keep? Setting aside non-financial reasons, the question is quite simple: what is the likely future performance of the investment?

At a personal level, you should ask yourself if your investment is the best use of that money. If you are retired, maybe it’s time you reduced the proportion of your assets tied up in where you live and put some proceeds into a bank or bond investment that gives you more income. Or if you’ve held some shares and you no longer think they offer future potential, then it’s time to sell. In any of these cases, how much you paid for them is irrelevant. If you bought the shares for $1 and they are now $2, you’ll probably be pleased.

What you need to ask yourself is whether there is still more potential for them to rise in value, and whether are there better places to put your money. What about if you bought them at $1 and they are now 50c? Same answer – consider what is the best use of that money from this point on. Simply holding them because you don’t want to take a loss and hope they get back to $1 is pointless. You are better off taking that 50c and putting it into something with the best potential for either capital growth or income. Let your head rule, rather than your heart.

Linda Sanders is an executive director of NZAX-listed Chatham Rock Phosphate and chairman of NZX-listed Widespread Portfolios. She has written on investment topics since 1981.
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