It's a perfect time to sell dud investments

Investopoly

With share markets at an all-time high and sentiment in the property market recovering, it is a great opportunity to divest of any underperforming (dud) investments. Not all investments perform as expected. Therefore, it's important you regularly review them. This review should be completed without any influence of emotion - it's all about the numbers. Let's first discuss why now might be a good time to do this. The US share market is high, very high Over the past 11 years, the US share market has increased by an annual compounding rate of over 14.5% and is now trading at an all-time high. To put that in context, $50,000 invested in 2009 (in the S&P 500 index) would be worth over $220,000 today! The chart below which has been produced by Advisor Perspective records four commonly used valuation metrics for the US share market since 1900. This chart doesn't need any commentary from me - it is obvious valuations are high! Probably, too high! In fact, the last time they were this high was in the early 2000's during the dot-com bubble. Most of us know how that turned out - the market fell by around 40% between 2001 and 2003. The Australian market is high too The Australian market hasn't risen anywhere near as much as the US market. It has increased by a compounding average of 6.9% p.a. since 2009 (compared to 14.5% p.a. for the US market). Looking at the CAPE Ratio valuation measure, the Australian market looks slightly overvalued (CAPE is currently 19.3 compared to presumed fair value of 17.6), but certainly to a much less extent than the US market. In a rising tide, all ships rise The rising domestic and international share markets tend to drag all stocks with them, good and bad ones alike. Irrationally exuberant markets tend to ignore investment fundamentals. US electronic car manufacture, Tesla is a case in point. Its share price has risen from $450 per share to over $1,150 per share in the past year. Its market capitalisation is now nearly $200 billion yet it has never recorded a profit. In fact, it burns through more than $1 billion of cash per year! But, despite that, the market suggests Tesla is worth 1.6 times more than Ford and General Motors combined! Ford and GM sell approximately 13 million cars per year. Tesla sells circa 370,000. Where is the common sense? Property market sentiment is strengthening We have certainly noticed an improvement in sentiment towards investing in property over the past year. This has also been reflected in auction clearance rates - which are now in the mid-70's - which is a signal that there are more buyers than there are sellers. According to CBA Economics, lending to owner-occupiers has lifted by 26% from its low point in May 2019 and by 15.5% for investors. That said, there isn't a lot of stock around, as the market doesn't really return to 'normal' until late February. Probably a good time to dispose of a dud property If you have an investment property that is less-than-perfect, then competition is not your friend. That is, it is best to sell an impaired asset when stock levels are lower, and buyers have fewer options. If we agree that demand for property is increasing, and stock levels are definitely well below normal, then now might be a perfect time to sell. Considerations before you dispose There are a few important matters to consider before you dispose of any underperforming assets. I have listed these below...