How do I know what to sell and when to sell it?

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Dear Nancy,

There are all kinds of articles and words of advice on how to build a portfolio, what to buy and how to invest. The one topic that is less talked about is "when to sell".  How do I know what to sell and when to do it?

Thanks,

Scott

Dear Scott,

You are absolutely correct. The majority of the fund managers, analysts, and portfolio strategists that I listen to emphasize how they choose what they buy, why they think it will do well and why it is a smart investment.  Less likely am I to hear them talk about their selling strategy.

It's typically easier to recommend what to buy than what to sell. This is understandable because if you are going to sell a stock it is usually for one of two reasons:

• you’ve made money and you want to take the profit, or
• the stock has lost money and it’s better to sell it than continue to own it.

It's usually the first reason that people sell a stock. It's less likely the second. It's because of the human factor in making the decision to take the loss.

First off, if you sell a losing stock, you are basically declaring that you made a mistake. My attitude is so what? It is always better to admit the mistake, act quickly to correct it, learn from it and move on. It is much easier for the investor or an adviser to decide to sell a winning stock, puff out their chest and declare how smart they were.

My discipline for my clients is the opposite. Even though it is a harder call to make, if an investment has not gone the way it should have: no growth, price decline, decrease in dividend, to name a few, I make the decision to sell.  Everyone has their threshold of pain when it comes to an investment's loss.  Some have the attitude: if it's only worth a couple of hundred dollars, what's the harm in holding onto it? The harm would be that each time you review your portfolio or open your statement you have the ugly reminder that you made a mistake. Some investors may need that to remind them not to make it again. My view is to not look in the rear-view mirror when you are trying to drive forward.

My sell strategy is to sell a stock or investment when it no longer continues to meet the criteria it was purchased to satisfy. It could be for the income, and the dividend was cut or reduced. It could be to grow in price and for an unforeseen reason failed to do so. There could be a significant price growth and the weighting of the holding is larger than appropriate, (yes, an overexposure to a single stock can be dangerous). It even could be that the funds would be better used in another investment with better prospects. It could be that the market value of the company exceeds what the company is really worth.  Having a sell discipline is just as if not more important that having a buy discipline.

Investing can be a very emotional activity when you don't intend it to be. Understanding this can only help you in the long run. If you continually sell your winners, eventually you could end up with a portfolio of only losers!

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.