Shares investing and trading potentially brings lucrative returns and when done right is a positive source of wealth-building.
However, there will be times when the right move is to sell some of the shares you are holding in your portfolio. It is easy for the media and others to affect your decisions, and cause you to behave emotionally.
Thus before investing, you will always want to have your Personal Investment Plan in place.
When to sell?
1. To reduce Losses
We all make mistakes, even professional investors who have invested for decades. The key thing is to realise when you have made a mistake and to cut your losses as soon as possible.
The bigger your loss (loss incurred %), the harder it is for other investment gains to cover your loss (returns to breakeven %).
Possible mistakes/drivers to reduce losses
• Investing on rumours/fake news/hot tips which fail to materialise.
• Analytical mistakes with data/assumptions used.
• Unexpected material changes affecting the company’s profitability, growth, and shareholder returns.
2. Reap profits
A key investor behaviour that prevents many from beating the street is the tendency to quickly sell winning stocks but drag their feet on losing stocks.
Possible times to make a profit
• Rapid price appreciation especially if driven by speculation or manipulation.
• A healthy market uptrend with your stock gaining 20-25%.
• When a single stock or sector becomes very overweighted due to gains.
3. Redeploy funds
If you find a better place with much better returns to redeploy your funds (after taking into account extra fees/costs), you may want to make the switch.
Changes to your portfolio can also be motivated by reducing risks by allocating your funds across markets and sectors.
Another possible reason to redeploy funds is to consolidate your holdings. It is crazy as an individual investor to hold and monitor 30-40 different individual shares.
If well-planned, six to ten individual shares should give you sufficient diversification. This allow you to focus on the companies in your portfolio.
Lastly, sometimes unexpected events or circumstances occur and you may need to liquidate part of your shareholdings.
How to sell?
1. Reducing losses
If you are trading, you should have a very specific cut loss set to make sure you do not lose more than the percentage you are willing to on a single trade.
If you are investing long-term, you should identify a specific long-term minimum internal rate of return (IRR)/compounding annual growth rate (CAGR) that you are looking to achieve.
If the investment no longer meets the objective, it is time to plan your exit.
2. Reaping profits
Know that your natural human tendency is to sell your winners. Establish clear rules for selling stocks that have exceeded preset performance goals.
A good gauge would be if a stock performs two to three times better than expectations and has become significantly overvalued.
Technical indicators are helpful for you to see signs of an upcoming correction, as are comparing ratios with the stock’s competitors.
For long-term investors who have found an excellent young growth stock, even more awesome years are ahead. Hold on tight!
Do not be in a rush to take all your profits at one time. Consider selling half to one-thirds of your stockholdings but continue to hold the rest.
This helps reduce your capital outlay and allows you to pursue other investments while still enjoying future gains.
3. Redeploying funds
For individual stocks, consider switching if you find a stock which performs significantly better (suggested minimum 5% better comparative performance).
For portfolio rebalancing, have your goals and plans in place earlier. Look at not only your current portfolio but future 12-month cashflow to be deployed into investments to form a picture of necessary adjustments to make.
If your portfolio allocation is off by less than +/- 5%, you may want to just leave it as it is as the time and effort required to make frequent adjustments are usually not worth it.
The worst time to liquidate your shares is when you are forced to sell. This is why it is always recommended that everyone has enough emergency savings in place before investing.
This article first appeared in https://mypf.my