Last week I wrote an article, Portfolio Management – When To Sell Stocks, that focused on helping you identify situations to sell stocks that are effective in the management of your portfolio.
This list of reasons to sell stocks included changes in fundamentals, using target prices, significant price appreciation, tax-loss selling, portfolio management and personal reasons.
Selling at the right time is an art in my opinion and something that requires discipline and experience. Your comfort zone will evolve over time, but knowing when and where to avoid the biggest mistakes will help you develop an effective selling strategy.
Remember that when to sell is very simple; it is defined by your investing strategy and portfolio construction.
Your selling strategy will be partially developed by trial and error and don’t expect to be completely comfortable with your final selling strategy for the first 1 to 5 years of creating your portfolio. Selling stocks for a bad reason won’t help you generate returns over the long-term.
Reasons NOT to Sell:
You Just Lost 5%
Remember…you must keep emotions out of investing. When you buy an investment don’t be surprised if you lose 5% right off the bat. Volatility in equities and mutual funds is part of the process. On a daily basis you will see some investments go up and some go down. If you’re investing for the long-term the daily price movements of your investments should not be where your focus is placed. Make sure you sell your stocks for the right reason and not just because your nerves get the better of you.
Another Stock is Going Up Faster
If you bought Company ABC and now realize that Company XYZ has gone up by 8% more than Company ABC don’t become alarmed. You can sell Company ABC, but make sure it is for the right reason. Ask yourself; Are the fundamentals better? Is the valuation more attractive? Make sure you sell for the right reason; because Company XYZ is a better investment.
Bad Economic News – The Markets are Dropping!
Reports of poor unemployment growth, GDP, interest rate adjustments or other macro economic news should not be the que or trigger for you to sell your stocks or mutual funds. The reasons for this are simple; market declines are opportunities to buy investments at lower prices; you want to sell your investments at the height of a market.
A Talking Head Told You To
A talking head is any investment professional in the media who provides an opinion on an investment with or without disclosing any conflicts of interest. The opinion of a single professional should never impact your decision to buy or sell an investment. Their opinion can help to guide your process for evaluating the investment, but never rush to sell an investment because one person said it was a poor investment. Evaluate it yourself and adjust accordingly.
You Haven’t Sold Anything in a Long Time
Selling because you’re bored will guarantee you develop a losing strategy. Effective portfolio management means you have the patience to allow an investment to do what you intended it to do. Portfolio turnover not only increases costs (fees & taxes), but can destabilize the balance you’ve worked hard to create within your portfolio. Just because you haven’t had any trading activity within your portfolio doesn’t mean you need to create it. Sell investments for the right reason; not just because you have too much free time to think about your next move.
Buyers Remore/Self Doubt
How many people have bought a stock on impulse and then regretted making the purchase almost immediately? If you’ve ever bought your first stock and felt as if you wanted to sell it automatically before you push the sell button WAIT!!!! Ask yourself the questions; Why did I buy? What made me buy? How does this investment improve my portfolio? What’s my plan?
Buyers remorse and self doubt can absolutely KILL the effectiveness of your investments. Buy for the right reasons and sell for the right reasons. Have those reasons on paper and before you buy/sell ask yourself if you’re doing the right thing.
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