When making an investment, not only the purchase phase is important but also the exit strategy. Disinvesting your savings is in fact an important choice that requires maximum attention, especially in times when the markets are volatile. Carrying out this operation can in fact have a significant impact on final earnings if you do not act in the right time.
Why do you exit an investment?
Many investors decide to disinvest when they reach the goal they have set while others observe the performance of the markets. Often, however, the choice to disinvest depends on changes in general economic conditions such as changes in interest rates.
Other causes are:
- the strong geopolitical tensions shaking the markets;
- the worsening of market prospects.
Added to these is also the specific situation of a company or sector in the event that the conditions under which that investment was interesting no longer exist.
To avoid finding yourself unprepared, it would therefore be advisable to plan an exit strategy in advance already in the first investment phase.
Is it better to exit an investment gradually or all at once?
Exit an investment gradually or disinvest all together? The answer depends above all on the market situation, the type of investment and your risk tolerance.
The most prudent strategy is certainly to exit gradually because selling at several points gives the possibility of reducing the risk of unfavorable timing. In fact, if the market continues to rise, part of the capital remains invested while if it falls, progressive sales help to limit losses. This type of strategy is frequently used for ETFs, equity funds and diversified portfolios because it allows you to withdraw capital little by little instead of selling everything at once.
How to avoid divesting at the wrong time?
To avoid disinvesting at the wrong time, the first mistake not to make is to act impulsively, especially in moments of strong market volatility. In fact, when prices fall rapidly, many investors prefer to sell for fear of losing more money. Often, however, significant recoveries come after the downturns. The first rule to respect is therefore not to make hasty decisions on the wave of emotion.
Another effective strategy is also to establish precise rules for exit from the beginning, both in the event of loss and gain. The stop loss, for example, allows you to close a position when the price reaches a certain pre-established level.
And if the investment is at a loss, is it worth disinvesting immediately?
If your investment is not going as you would like, waiting may be the best choice, especially if it is long-term and diversified.
To make the best choice in any case it is important to understand first of all whether the conditions that led to the initial purchase still exist without thinking only of recovering the money invested.
What taxes do you pay if you disinvest?
If you decide to disinvest, it is important to also consider the taxes on the profits obtained. Capital gains realized from the sale of financial instruments are usually subject to a 26% tax. The latter usually applies to futures, ETFs, stocks, corporate bonds and other financial products. As regards the taxation of dividends, however, it is usually 26% although there may be specific cases with different rules.
However, there are exceptions such as for government bonds including BOTs and BTPs which benefit from a preferential rate of 12.50%. This is the same tax treatment that is also applied to bonds issued by public bodies, to securities of international organizations and to bonds of foreign states that are part of the so-called white list. The latter is the list of countries that collaborate with Italy in the exchange of tax information.
In any case, tax rules may vary based on the type of financial instrument and the specific situation of the investor.
It is also necessary to consider the stamp duty applied on financial instruments held at brokers or credit institutions, equal to 0.20% per year on the overall value of the portfolio. The calculation is based on the market value of the portfolio on the reporting date and not on the earnings obtained. If at the end of the year, for example, the total value of the portfolio is 50,000 euros, you pay 100 euros in stamp duty. The charge then follows the frequency with which the broker or bank sends the securities account statement. If, for example, the reporting is quarterly, you will pay 0.05% every three months.
Is it worth reinvesting the capital immediately after disinvesting?
If you exit an investment, reinvesting can be useful to take advantage of the effects of growth over time. This happens because you benefit from the compound capitalization mechanism, i.e. the reinvestment of accrued returns which can generate other earnings over time.
However, investing a large sum in a single solution involves risks if the entry takes place in a particularly unfavorable phase for the financial markets. The reason is that the investment could undergo significant fluctuations in the short term. This is why it is important to carefully evaluate:
- the time of investment;
- your time horizon;
- the level of risk you are prepared to take.
How important is diversification when exiting an investment?
Even in the disinvestment phase, diversification plays a fundamental role.
A well-diversified portfolio, as Warren Buffett also often recalled, helps to reduce overall risk because the negative performance of a single asset does not have an excessive impact on total assets. It may therefore be more prudent to distribute sales over time and maintain a certain balance between the various instruments.
Is it worth relying on a financial advisor to disinvest?
If you have a large and complex investment portfolio, it may be useful to contact a financial advisor if you want to disinvest. The reason is that the latter can help to evaluate several aspects more carefully including:
- personal goals;
- the risk level of the portfolio;
- the tax consequences linked to investments.
Before contacting a consultant it is important to check that they are qualified. In Italy, authorized consultants are in fact registered in the Single Register of Financial Consultants (OCF).
