When to sell?

I think this is one of the toughest questions in investing. Buying is relatively easy I think. You like a stock or index for certain reasons (fundamentals, yield, valuation,..) and decide that those are worth taking the risk. For an individual company this would be that the current market price is below the target price. You always read about analysts having target prices for a company for example. Naturally those target prices are not set in stone and move around somewhat just like their recommendations. I do not follow such recommendations on buying or selling. I try to avoid the question of when to sell by not choosing individual companies but investing in diversified ETFs. I do however look at the dynamics and valuation criteria of the ETFs I have in my portfolio. They tend to move much more gradual than any individual company. I guess that is an advantage but also a disadvantage of applying my diversified strategy. But when or in what case is it good to sell? Is it simply the moment when the reasons why you bought it in the first place do not hold anymore? If you sell, what will you do with the proceeds? Buffett terms this ‘looking to marry vs looking to date‘ and I really like this approach. I for one certain look to marry as opposed to dating. In fact, I am married with two children but that’s not necessarily related to investing 🙂

when-to-sell

I also have to admit that I recently sold one of my ETFs but that was a completely different story why I did it.

So far, the best schematic explanation on when or why to sell an investment was the one by fellow blogger Safal Niveshak. On his website he provides a flow chart which shows that good reasons to sell can be that (1) you based your initial analysis on incorrect data,  (2) the fundamentals of the business develop negative despite good analysis on your part or (3) you need the cash that is tied up in the investment for something more important. In almost all other cases it is better to stick to your investment, avoid transaction costs and enjoy the benefits in the long run. I completely subscribe to his analysis.

What do you think? Have you sold investments for other reasons? How have your selling decisions turned out for you?

 

Disclaimer: None of the content of this site is to be considered investment advice. Readers have to form their own opinion about which investments are right for them and take full responsibility for their own actions.

6 thoughts on “When to sell?

  1. Great post, I actually follow Safal Niveshak’s guidelines. I think they were also discussed in Phil Fisher’s books. Also, if something I own gets crazy overvalued quick I’ll probably sell for a quick buck.

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  2. I generally sell for three reasons.

    1. The stock has performed so well that it is now too big a part of my portfolio and/or has driven by asset allocation outside it’s range. That’s a good reason to sell as you’re locking in profits and it generally keeps me from holding stocks for far too long.
    2. The business used to be good but now sucks and I don’t want to own it anymore. There are companies that I used to like that I no longer like. It’s as simple as that. I buy companies that I want to hold for 10+ years. If I look at the company a few years down the road and I no longer feel the same about it then it’s time to jump ship.
    3. The valuation or fundamentals have changed. I like good companies that are fairly valued. Once they’re no longer fairly valued or good companies then I’m out

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    • Thank you for your comment timeinthemarket.com
      I very much like the portfolio size angle. What % weight do you consider too big? While you can never go broke by realizing profits, I think there is the risk that you might sell the best company you have too early.
      Thank you for stopping by!

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  3. I typically won’t sell unless the fundamentals of a company have significantly changed. Even with a dividend cut, I won’t necessarily sell if I feel like the dividend cut was the right move for the business and they will be stronger going forward. For example, I ditched ARCP after they cut their dividend and there were investigations into their financial reporting. There was no certainty going forward and I wasn’t comfortable owning them. KMI on the other hand, cut their dividend and found themselves in a much better position with a strong balance sheet. Therefore, I kept the company and couldn’t be happier with my decision.

    Bert

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    • Thank you for your comment , Bert. I totally agree. Companies can restate their financials but the I my way to restate a dividend is doing the reverse ie raising/issuing fresh equity. I think it is reasonable for any company to think about the balance sheet before paying a dividend. Well done on KMI.

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