If you thought buying the right stock was difficult, some investors have a worse time selling stocks. We buy them based on (hopefully) thorough research and business-like attitudes.
But when should you pull the "sell" trigger? The old saying "buy low and sell high" sounds easy…until you put your money down. Every day as an investor you may look at your portfolio and see prices go up and down. If one goes up 10%, should you sell it to lock in the profit, or do you hold on for further upside?
Oppositely, when staring down at a paper loss, is it better to take that first loss, or buy more of the stock at a discount?
Basically, you need investor discipline with solid rules for selling just as much as for buying.
Here are four reasons for you to sell a stock. Some are like insurance and some are just common sense.
- The reason you bought initially is no longer valid
You had a definite set of reasons why to buy in the first place. Along the way things changed and those reasons or catalysts have disappeared. The stock story has worsened, so it's time to say "Adios".
- Fundamentals are deteriorating
Before, the stock had solid earnings and growth, then…revenues drop. The company can't get rid of inventory. Debt steadily rises and the company has difficulty collecting payments rightfully due. If you can't see it as a short-term problem, jump ship and save your capital.
- Sudden turnover in management
When a company has a series of high executives suddenly leave their posts, it makes you wonder what they know and you don't. Is it internal corporate strife or are they jumping ship like in reason #2 above? Be on high alert. A stock could fall suddenly before any of the bad news comes out.
- A better stock comes along
Sometimes you just have to make space for a more attractive investing opportunity. If stock B is offering a much higher return with less risk than stock A, then you have to make the move. Your decisions now affect how much wealth you create in the future. Remember, like in The Godfather, it's nothing personal- it's just business.
For example, many of the resources stocks like BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO) are heading toward cyclical lows. Investors should avoid commodity businesses and concentrate on companies with strong brand names or specialised products and services that can command premium prices.
Two such companies are REA Group Limited (ASX: REA), the operator of the number one site for property searches realestate.com.au, and biopharmaceutical CSL Limited (ASX: CSL), which produces medical products and vaccines high in demand. They could give possibly better returns over the long term.
