Prevent Selling Yourself Out at a Loss
One of the best ways to get rich through investing, is being able to invest into long-term assets, for 15–20+ years, allowing them to grow and keep compounding, without having to realize any gains on it along the way. Unrealized gains are one of the most powerful tools to compounding your wealth. Every time you have to realize a gain by selling an appreciated asset, you pay your tax and start over with less money.
The problem that most people face, is they may buy an asset hold it for awhile, but they haven’t managed their day to day, month to month cashflow well. They have a deficit, and suddenly need to sell their investments to get more cash. They made several wrong decisions here. One, you should never invest money that you need. Because two, the moment that you lose money that you needed to live, you’re going to be forced to sell your assets, and you may be selling yourself at out a loss. If the asset is up, great, you’ve made a bit of a gain, but now you have to pay taxes on it, which you may not have wanted to do. You need money and you’re now incurring an additional tax expense. But if the asset value is down, even worse, as you’ve ensured your loss because you must now sell regardless of the price. You lost control of when and for how much you would sell for.
This happened a lot during the 2008–2012 US real estate market crash. Most of the people who lost money, were forced to sell their assets because they did not have enough cash or cashflow keep them afloat during the downturn. Although not all US markets are back up since the crash (2018), a lot are, and most of them that held onto their real estate during the crash and the rise, are now better than they were before. Those who were keep their assets, had additional cash reserves, or enough cashflow to withstand any downturn, and ride the wave back up. They were not forced to sell themselves at a loss.
Another example. When the stock market crashes, people panic. The problem with stocks, unlike real estate, is it only takes 1 second to sell yourself out at a loss with the click of a button. Unlike real estate, it takes a longer. You have to think about selling, list it on the market, likely work with a real estate agent, negotiate with the buyer, and hope they come through with their financing to close. In real estate, it’s harder, to sell yourself out at a loss because you’re not as quick to sell at a loss when something goes bad. Being able to sell your stocks at rock bottom prices in 1 second, is a quick way to lose money in seconds.
On the flip side, what is great about stocks, is when they crash, you can instantly buy it at a discount. Unlike real estate, it’ll be likely another 15–45 days until you can close on a transaction.
Manage your cash flow well. Have positive cashflow, spend less than you earn, and have cash reserves. Never be in a situation where you’re forced to sell your assets because you didn’t manage your finances well. This is a quick way to financial ruin.
I’ve had so many friends who bought wonderful stocks, sold them because they had to, and missed out huge gains in the future. Because the businesses were great, but they couldn’t manage their money right, and their investments suffered huge opportunity costs.
Prevent yourself from selling out at a loss, or when you didn’t want to sell.
