LONDON, 24 May 2004 — Picking the right stock is one thing. Knowing when to sell and reinvest your money is another. Even investors who are shrewd buyers often prove to be lousy sellers. In many instances, they just stay too long in investments that should be sold. Or they panic at the first sign of trouble and dump investments that should be held.
There are investors, and I knew a few, who opted to keep their investments in funds over the past two years even though the return on such funds had slumped. A wiser alternative for many would have been to take profits in a stock market that held up pretty well over a given period. So many investors missed recent stock market rallies. I am not suggesting the investor to become a market timer by trying to guess every turn and move in prices. But unless the investor pay as much attention to selling as to buying, i.e. not acting too soon but not waiting too long, the returns are likely to be mediocre and even below par.
The question becomes: Why don’t investors know when to sell? One Reason is that many fall in love with their investments.
Maybe they have been so successful with an investment in the past or, maybe they inherited it and do not want to part with it. Whatever the reason, there often seems to be an emotional attachment to a particular investment.
My advice is that if you are waiting for someone else to tell you to sell, forget it. There is an enormous number of brokers and investment analysts and planners whose sole aim in life is to get you to buy what they are selling. And, speaking from experience, seldom, if ever, will any of them tell you it is time to sell. When they do, however, it may not be in your best interest. You could wait nearly forever before a broker warns you that a previously recommended stock should now be sold.
There are what I term as codes in the profession: If the broker rates and recommends a stock for long-term growth potential, that’s a euphemism for “sell”. If he merely rates a stock a “hold”, you probably would be wise to sell short.
There is always the temptation for a lot of investors to sell at the first break in performance and to shift to another investment that looks attractive. What they have done, in essence, is sell one investment at a gain or loss, and bought into something else at what may be its high point. They were tempted to shift too quickly without adequate rationalization to their selling decision.
Sometimes the decision to sell an individual stock does not originate with the investor but with the stockbroker looking to turn a quick fee. There are, indeed, few unscrupulous brokers who have been known to sweet-talk unskilled investors into shifting from one stock to another for no good reason except to generate commissions. The term for that is churning, and while this practice is illegal in many countries, that does not keep some brokers from trying it. So being a successful investor involves knowing just when to sell, i.e., not too late, but not too early either.
First, consider selling an investment when it lags behind other similar investments for an extended period. Do not sell at the first hint of trouble. Even the best of managers with the best investment strategies can have a bad year every now and again. Here, patience becomes a virtue, but with limits. I suggest if a stock or a fund is still lagging after three years, then it would be time to sell. The three years is considered to be a typical market cycle. Other sectors in specific industries, or market segments, are viewed as a special case with a time horizon of one year or less, since they could be affected during shorter periods.
The trick here is to set a profit target and be prepared to sell when you hit that target without hesitation. In fact, it would be helpful to set performance targets for each investment you own. Be ready to sell and move to something else when and if those performance targets are realized, rather than hanging on or waiting for a hapless investment to turn profitable. Sell only if you have made a reasonable profit, or loss, as much as you are willing to lose.
Second, consider selling when you detect a serious threat that would prompt you to change accordingly. As an example, your star fund manager may leave and be replaced by an unknown. I suggest that you give the new manager six months to test his ability and professionalism before making any major move.
Third, consider selling if your asset allocation has been skewed. You construct an investment portfolio allocated among stocks, bonds and cash, and the success of that allocation can contribute to your overall investment strategy’s return.
Finally, consider selling if something fundamental in your life has changed. In this instance, personal priorities, such as family needs, business ventures, etc. dictate your decisions. In the final analysis then, selling an investment is seldom easy. What you have to keep telling yourself is that you are not selling because you have failed. No, you are selling because you want to enhance your investment portfolio. You want to do even better.
(Habib F. Faris is vice president at Clariden Bank, London)
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden bank makes no representation or warranty as to the accuracy, reliability, or completeness of the information.)
