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 🙂
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?