When Is the Right Time to Let Go of an Asset?
It’s the end of the quarter, which means it’s time to review the numbers.
The new product line is absolutely crushing it, up 40% year over year. However, the acquisition from 3 years ago never really worked out, and it doesn’t look like that’ll change anytime soon. It’s not exactly something that needs to be let go at all costs, but it’s also not quite useful.
That right there is your problem. It’s not urgent, so you leave it be.
But assets are sneaky, and they won’t have some dramatic way of showing that they can’t earn their keep. They just… Sit there. They cost money, and perhaps it’s not a lot of money, but they’re not bringing in enough to cover what they eat up. And that means they’re costing too much.
It doesn’t matter what you paid for it. All that matters is what it’s going to do for you from this point on.
If the answer’s “not much”, it might be time to let this thing go.
Why People Hold Onto Assets Longer Than They Should
You might think that anyone who makes a bad decision when it comes to assets doesn’t have enough financial knowledge, but that’s not true. Bad decisions come from something much more human.
You know that annoying feeling when you think that walking away from something will be a mistake? You spent so much money and effort on it already; how can you let all that be for nothing?
| Property owners (private or business) tend to continuously invest into an underperforming property because of something called ‘sunk cost fallacy’, where past investments negatively influence current decisions (like when gamblers keep investing money into a gambling machine thinking that their chances of winning are higher because they’ve invested so much already. – U.S. Securities and Exchange Commission |
That’s understandable, but here’s the thing: that money is already gone, and it’s not like you can get it back if you hold onto this longer.
So, what ends up happening? Well, nothing good, really.
You get too busy trying to justify the past that you can’t see something that’s way more expensive. Every single dollar that’s tied up in an asset that’s not moving forward is a dollar you can’t spend on progress. Basically, what this means is that you’re babysitting dead ends when you could have spent that time (and money!) on finding opportunities.
| All capital tied to underperforming assets carries significant opportunity risk. This means that this same capital has a higher chance of generating returns if it’s reallocated elsewhere. – Federal Reserve Bank of St. Louis |
The biggest loss isn’t necessarily what you spent but everything you weren’t able to pursue because your plate was too full with stuff that leads nowhere.
Take real estate, for instance, which is a great example here:
Imagine you have a rental unit that always seems to require some type of work/maintenance. As soon as you fix something, invest in something, there’s this other thing that requires immediate attention. There’s very little room to breathe (from a business/financial point of view). Today it’s the water heater, tomorrow it’s the AC unit, then the roof, a bit of water damage here, and electrical issues there. It’s a massive headache.
And to make everything a million times worse – the tenant seems to be allergic to paying rent on time.
What’s the point of having a rental like this?
There are several paths forward from this, like listing the property or getting in touch with companies that specialize in cash property buying, such as A-List Properties, to have them help you out.
But waiting is safer, right? It’s the responsible thing to do.
So you keep the status quo because you’re nothing if not responsible. Meanwhile, the status quo gets more and more expensive every day.
How Do You Know It’s Time to Cut the Cord
It would be great if there were a magic formula you could use, but there isn’t. Instead, what you have to do is look for signs.
Here are some of the best ones.
When Maintenance Is More Expensive Than Progress
Not all assets crash in value in an instant. What usually tends to happen is that the property simply becomes more expensive to maintain as time goes on. Compare this with an old car that starts leaking oil, the expensive stock parts start needing replacement, the engine starts having issues, the car starts having electrical issues, etc. It just becomes more expensive to keep.
Sure, one single repair won’t cause you to panic. But once you add them all up (think annually or biannually), the numbers often end up being staggering.
The asset doesn’t necessarily have to fail to become what’s considered ‘inefficient’. All it needs is for it to take more resources from you than it’s giving back.
It’s that simple.
| Whenever operating expenses of a property exceed economic return of the same property, the asset becomes economically inefficient to retain. – U.S. Department of Energy |
When the Market Moves, But the Asset Doesn’t
Markets are always changing, but assets? Those can stay stagnant forever.
You might have a legally valid patent, but what good is it if it protects the technology that’s no longer being used? If you do business in a market that’s shrinking, you might still turn some sort of profit, but in the long run, it doesn’t make sense because your customers are disappearing.
When Emotion Becomes Part of the Value
Emotional attachment to objects is nothing new, but keep in mind that that’s how normal people become hoarders.
If you hoard antique plates, that’s not that big of a deal, but if you’re holding onto an asset that’s not making financial sense because of your emotions?
Now, that’s dangerous.
Money and emotions shouldn’t mix. Ask yourself whether you’d buy this asset right now at its current price. If you wouldn’t, then you know what to do with it.
Conclusion
Every single asset you have has to justify that it exists 24/7.
There’s no point in sticking to something that no longer serves you unless you don’t mind ruining your wealth because of it. The simple fact is that the world changes all the time, and so should your decisions.
When you let go of something that’s draining your bank account, you show that you’re smart enough to recognize that you know more now than you did yesterday.
