Never mind when or what to buy. Do you know when to sell?
Knowing when to sell a stock or bond out of your portfolio is critical to managing your money. But most people don’t think about it very much. They figure that if you own the right stocks, the rest will take care of itself. A quick survey of the literature comes up empty. And when did you ever see the financial press feature “Stocks to sell in the next year?” But few people have a “forever” investment horizon. Buying a stock ultimately means selling it, sooner or later.
There are as many approaches as there are investment styles: sell the stock when it reaches a price target; set a trailing “stop loss” signal 15% below the stock’s high price; hold the stock as long as its fundamental value continues to rise, rebalancing occasionally; sell when the stock becomes too volatile. The critical issue is to have a plan and stick to it.
The problem is, most of us fall in love with the things we own. People who bet on horses almost always raise the chances of their horse winning once they place the bet. Folks who might value Super Bowl tickets at $500, if given those tickets, wouldn’t sell them for less than $1000. And once people own a stock they invent all kinds of reasons to keep holding it, even if the original premise for buying it is no longer valid.
Selling a stock—especially one that’s fallen—is hard. It invokes feelings of regret and failure that most of us would rather not face. But mistakes are inevitable in life. It’s only as we face them that our portfolios can advance, and that we can grow as people.
Douglas R. Tengdin, CFA
Chief Investment Officer
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