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Have my long-term goals changed?
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Do I feel I'm missing better opportunities?
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Will I suffer seller's remorse?
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What about tax implications?
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Will my risk increase?
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What will I buy in its place?
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What if I add an investment instead?
Think back to the time when you first started setting money aside in a long-term investment plan. You probably had some specific goals in mind, such as financial security for you and your family, college funding for your children, and a comfortable retirement.
Depending on how long you have been investing, you may have already seen your investments ride the ups and downs of shifting economic trends. Or maybe investing is a new experience and you're not quite sure what to make of your investment's performance amid recent economic and market shifts.
History tells us that investment markets move in cycles that are influenced by a variety of factors such as the economy, interest rates, and inflation. If the current market cycle doesn't seem to favor your choice of investments, it's natural to consider making changes. Before you do, make sure those changes are consistent with your long-term investment goals. If you're thinking about selling any of your investments, answering the following seven questions first should help you and your financial advisor make decisions that keep your portfolio on the right track.
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Question |
Action step
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| 1. Am I selling this investment because my long-term goals have changed? If the answer is yes, you may be making a sound decision. Changing goals may require a change in your investment program.
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Let your financial advisor help you decide if this is the case. Evaluate other factors such as tax implications, transaction costs, and alternative investments.
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2. Am I selling because other investments have performed better, and I feel like I'm missing out on better opportunities?
Sometimes this can be a valid reason to sell. On the other hand, it's not unusual for investments to go through periods of underperformance. Not all funds can top the charts at the same time.
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Review the reasons you initially chose the investment. Evaluate its performance in the context of investment and economic conditions. If the investment still suits your long-term goals and there's a valid reason why it was out of favor, you may want to keep it.
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3. How will I feel if I sell this investment and suddenly it outperforms?
Imagine patiently enduring a period of underperformance. Then, your patience wears thin and you sell — just in time to see your investment roar back into favor.
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Talk to your financial advisor about why you selected this investment for your portfolio. Determine if it still meets your needs. Think twice before exposing yourself to seller's remorse.
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4. Have I considered possible tax implications?
Many investments have appreciated considerably over the last several years. Are you willing to sell your stocks or mutual funds and possibly pay capital gains taxes only to discover that you want to own them again?
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Work with your tax or financial advisor to determine your cost basis and the tax implications before you sell an investment.
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5. Will selling this investment affect the overall risk profile of my portfolio?
You probably selected some investments specifically for their low risk characteristics. Conversely, you may have selected higher risk investments because they had higher growth potential.
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Determine how selling this investment will shift your portfolio's reward potential in relation to its risk profile.
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6. What will I buy to replace this investment?
It's a good idea to know what you're going to buy with your proceeds before you sell. Consider the possibility that your proposed purchase could be a hot investment nearing the end of its performance cycle. You should also think about whether your purchase duplicates investments you already own and how it will affect your overall risk profile.
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Decide whether the investment you plan to buy is really more appropriate than the one you already have.
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7. Would I be better off adding an investment to my portfolio rather than exchanging one for another?
This solution lets you adjust your portfolio without incurring tax consequences and without selling an investment at what could be the wrong time.
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Consider adding a different type of investment to your portfolio to increase your diversification and your opportunities for appreciation.
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Most people think successful financial planning depends on choosing the right investments. Keeping the right investments can be just as important. Be sure to maintain a long-term perspective and talk to your financial advisor before making any changes to your portfolio.
This information is intended to provide general investment education and is not intended to provide investment advice. For more specific information on how to allocate your investment savings plan, please contact your financial advisor or Delaware Investments.
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