When to Trim

Good morning and how are you doing? How has your week been so far? 

Someone asked this question in our community and it got the team thinking: "When does one trim an investment?" To trim, from a financial perspective, means to sell part of an investment. 

There is no straightforward answer to this. So let’s look at it from different scenarios.

When an asset is overbought 

An asset is overbought when it is trading above its fair value. The fair value varies for different people. A stock trading at ?20 could be fairly valued to analyst A. That same stock could also be overbought to analyst B. 

You have to arrive at what you consider fair value. That an asset is trading above its fair value does not mean its price will drop overnight. Sometimes it could take months or years for a correction to occur. 

When one is overly concentrated 

Sometimes, one can be overly concentrated in an investment such that trimming your position in that investment would not be a bad move. 

One could be overly concentrated within or across an asset class. So, if one has about 90% of their stock portfolio in one stock that has appreciated massively, one could either sell down to cash or buy into an Exchange Traded Fund (ETF). 

When opportunities arise 

Sometimes, opportunities may arise and you have no spare cash. In that case, you could decide to sell down an existing investment that has appreciated significantly and then take a position. 

To cut losses

You can also decide to trim an investment if it has either made losses or has performed below your expectations. 

However, before you trim, ask yourself the following questions: What do I intend to do with the proceeds of any investment I am selling? Do I intend to reinvest it in another asset or spend it on some other needs? 

Having a clear plan keeps you on the right track. Whatever you decide, always have some cash at hand. 

Are you yet to start your investment journey? Our community would be a great fit for you. You can sign up here

Have a great day.