Why to Cut Bad Investments

Let me start by asking you a simple question. Why do you make an investment?

The obvious answer that you probably and most surely come out with would be to make profits.

Yes, you are right.

Each investor makes an investment because he or she is looking to earn profits from the invested sum.

But, what about when your investments do not give you any profits. Rather, on the contrary, you suffer losses on your invested sum.

Would you then still like to continue with your same investment portfolio?

What would you do in such circumstances?

Well, there is no benefit by continuing to hold the investment portfolio that gives you losses.

Be it an investment in property, mutual funds, stocks, shares, or debentures. If your investment is giving you losses, then you would be better off by getting rid of such investments.

The perfect solution would be to cut your bad investments.

Here, we show you how you can do just that.

You will get to see why to cut bad investments.

However, there are lots of investors who either do not keep track of their investments or they just continue with the same investment portfolio.

If you are one of those who have adopted this approach, then believe me that you would not be able to fulfill your investment goals. Rather you will be just blocking your invested sum in unprofitable schemes and avenues.

Cut Bad Investments

As your investment portfolio accumulate losses, you go on to lose on the principle sum that you had initially invested. So, if you had invested $100, you will not even be successful in recovering your invested sum, and there is no possibility of receiving profits.

As a proactive investor whose only aim to invest is to make profits, you should always keep an eye on your investment portfolio and check how your investments are performing in comparison to the prevailing market conditions.

You should be vigilant enough to come to the conclusion that a particular investment has gone bad and it is the right time to get rid of it.

The more you delay the required action of leaving a particular investment; the chances are that you may suffer more losses.

But does there exist any benchmarks or criteria that can help you arrive at the conclusion that it’s time to get rid of the bad investments.

Yes, this is a very crucial and critical step in dealing with your investments.

Let us know why to cut bad investments.

Invest in what you know

One of the most successful investors of our times, Warren Buffett, has a great investing rule. He doesn’t invest in a business that he doesn’t understand. He only invests in things he knows.

Never invest in a business you cannot understand. – Warren Buffett

Let this be your golden rule for investment.

So, if you have invested in businesses that you have no knowledge whatsoever, you would be better off by disinvesting in those options rather than suffering losses when they turn into sources of bad investments.

So, you should only invest in things you know.

However, if you are willing to take losses in the hope of learning a new space that’s a different take altogether. Having said that, you should take your time, make a detailed analysis, and even consult a financial advisor for feasible options in which you can invest safely.

Before your investments turn into bad investments, it’s wise to let go those investments that you do not understand.

You can’t predict the future

There’s a particular weakness of some investors.

They get too greedy.

So, when the stock market is in their favor or showing bullish trends, they tend to hold on their investments in the hope of making more profits.

However, you can’t predict the future.

Investments which are giving favorable returns may turn out barren lands. You may suffer losses.

So, don’t become the greediest person out there.

Don’t wait for the stock markets to peak.

You will never get the perfect time for making the biggest profits. Unless you have data backing your intentions, you should not hold a profitable investment for long. You never know whether an investment which is giving you profits can even show you losses.

Even the experts cannot predict the future.

So, there is no benefit of becoming too greedy.

It is better to cash-in before it is too late.

Monitor your Investments

One of the crucial steps of avoiding bad investments is to monitor the performance of your various investments. The period of monitoring can vary, and it can be for your convenience.

It can be monthly; you can also decide to review your investments after a quarter, in a six months time or even after a year. In our opinion, a quarterly review would be just perfect in most situations.

With a periodic review in place, you get to have a clear picture of all your investments whether they are in stocks, mutual funds, precious metals, property or something else.

You would then have your hand perfectly placed on the pulse of the prevailing market conditions. You would then come to know the exact market scenario and the present performance of your investments.

Mark your Investments as “Good” or “Bad.”

Having adhered to a periodic review, the second big step comes in the form of marking your investments as good or bad. At this juncture, there are some points which you should always be careful to follow. First of all, it is important to note that you must not be quick in marking your investment as bad.

By this, we mean that you should stick to your investment for a period which ranges from two to five years (approx). This is so because sometimes the overall market conditions may be bearish and so your investments too would not have any scope for appreciation.

Sometimes local conditions, other economic situations to influence the performance of your particular investments. So give enough time to your investments to appreciate and still if they are performing poorly then surely sell them off.

Set a Benchmark

Creating a benchmark also helps in deciding whether your investments have gone bad. So you should create a benchmark, and if your stock goes below this particular mark, you should sell that investment to protect your investment interests.

For example, you can set a benchmark like the S&P 555, and if your fund goes below this benchmark, you can sell that off. Again if your fund is performing poorly or is down in an Up Market continuously for more than a year, then it would be better to mark it as a bad investment and cut it out from your investment list.

What if your real estate property prices are stagnant?

Bad investments may crop up not only in stocks or mutual funds; they may also arise in real estate investments as well.

Suppose that you had purchased a property in the hope that its prices would rise. You waited for three years patiently hoping that its prices would go up. But it does not happen that way. The prices were stagnant. In such a situation there would be two choices in front of you.

Either you hold the property in the hope that prices would appreciate or you can decide to sell that one off. When you decide to sell a property given its stagnant prices to cut your losses, you should check for few things first.

See whether this is a general economic slowdown or prices of that particular region is not appreciating. If the case is the second one, then it is the right time to sell the property and look out for a new one in some other region.

Concluding

So, likewise, you can have some other type of investment too. And in those cases too you can follow the guidelines and precautions mentioned as above. The important thing is that you should never forget and ignore your investments.

Once you make an investment, it is also important to monitor and review them periodically. Then only you would be in a situation to decide whether you are holding a good investment or a bad one.

And if you have a bad investment then the obvious solution is to get rid of your bad investments and have new and suitable investments in place of them. It will help you in achieving your desired investment goal of making profits and gains.

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