The myth
If your money is currently invested in an asset that’s worth more now than when you bought it, you’ve made a profit – at least, on paper.
There are “paper gains,” then there are “actual gains.” Paper profit means your earnings aren’t “real” until you sell the asset at a higher price.
Selling is the only way to lock in these gains, and so you might feel the pressure to secure the earnings before prices slide back down.
The reality
While the main point of investing is to grow money, there are things to consider before selling or withdrawing from an investment to lock in earnings. Here are a few questions to ask:
Are you doing short-term or long-term investing?
Some people do short-term trading and so they might sell an asset as soon as they’ve made a profit. However, this fast-paced style of buying and selling can be risky and require advanced skills.
It may not suit you if you’re a long-term or passive investor. Additionally, if you have a good reason to believe that the asset can still grow further, like strong fundamentals, then you might want to continue holding on.
Have you reached your goal?
Most people choose an investment for its growth potential, but there are other reasons to invest in certain products.
You might have wanted to minimize risk by diversifying or earn regular income via dividend-paying assets. If an investment is still doing what you want it to do, then you might want to keep it in your portfolio.
Selling is an option if you’ve reached your goal amount and the time has come to spend the money the way you planned.
You can consider partially selling or withdrawing if you’re happy with the returns but don’t need to take all your money out yet.
Are you making decisions based on emotions?
Sometimes, investors sell winning investments out of fear that prices have peaked and might drop soon. Fear-based decisions can disrupt your strategy and possibly lead to missed opportunities for further growth.
A well-thought-out plan that is tailored to your strategy, goals, and risk tolerance can keep you from acting on impulse.
Verdict: It depends.
Locking in investment returns can bring satisfaction. It can feel like a win to turn paper profit into actual cash.
However, there is also a risk of missing out on future gains or making rash decisions by blindly chasing profit.
Selling blindly might also cause your re-entry point to be higher, requiring you to shell out more money if you want to buy shares or units of an investment again.
If you’re doing dividend investing, selling means you’ll own less shares and so you’ll likely receive less dividends when the next payout comes.
Carefully weigh your options based on your strategy or goals to know whether selling will truly pay off.
