10 Reasons To Sell Shares

By Neil Faulkner

There are many reasons to dump an investment. Some make sense and some don't.

Stephen Bland wrote recently about 'When To Sell Value Shares'. However, there are a wide range of rules and reasons put forward to sell shares, often without rhyme or reason! I've been scouring books and the Internet for the most often repeated rules, so let's take a look at some of the most widely quoted.

1. Buy low, sell high
This summarises the fundamental point of investing for capital gains, but needs some embellishment. What is low? What is high? What if your share only goes lower? It really means buy cheap shares and sell them when they get expensive.

2. Fix an exit price and when your share reaches it, sell
This is too crude in my view. A company's prospects will improve or deteriorate all the time. That means a good exit price moves up and down all the time too.

3. If the reason you bought changes, sell
This is still a little too vague, so let's put it another way: if there's a fundamental change, sell. This means that either the share price has risen so much that it has extinguished the reasons you bought it for, or the company's prospects have deteriorated so much that the current price no longer justifies holding on to it.

4. If you can no longer remember the reason you bought
There are some very curious ideas of when to sell on the Internet. I found no less than three websites recommending that you sell if you've forgotten why you bought and can't find a good reason to keep holding. If you don't know why you bought, you clearly do not have any strategy at all! If you're in this position, you shouldn't be holding shares.

5. Sell gradually as the price rises
Some advocate selling a portion of your holding as the price rises. Perhaps you sell a quarter after the stock rises 25% in value, the next quarter when it's risen by 50%, and so on. This is about locking in your gains. However, if you have a diverse portfolio, you don't need to protect your gains in this way too. Many people prefer the reverse of this: to cut your losses and run with your gains.

6. Sell to rebalance your portfolio
If you have a well diversified portfolio, one of your shares has to perform remarkably well to become a large chunk of your holdings by value. But it happens. Some advocate selling a portion to rebalance. I think you should consider investing future sums of money in your other shares as an alternative way to get closer to a balance.

7. Sell on falling markets
Many investors sell on plummeting markets or, as many in the financial services industry like to call it, 'volatility'. If you do this, you're trying to forecast economic and business trends, which is extraordinarily difficult.

8. Timing a market cycle
Some sectors, such as mining, housing and construction, have historically been very cyclical. Many attempt to pre-empt the next downswing and sell. I would say that you need to be particularly knowledgeable in the sector to have a chance of repeatedly outperforming with this method.

9. The stock price has soared
Some say sell when the price skyrockets, but that's just likely to cut short future gains, much like in point five. It doesn't make sense to base your sell decision solely on a massive price change, as the price may still be too low.

10. The stock price has plummeted
Conversely, some say sell when a share plummets before it falls further. If it has plummeted, there may be a good reason, which you should search for. If there is no good reason and the share still ticks all the boxes you used when you bought it, does it really make sense to sell?

Summing up
There are many more reasons people give to sell shares, but I think the above give you the idea. Investors have all kinds of reasons, but most of them are based either on predicting the economy, which is extremely difficult or impossible on a regular basis, or solely on what happens to the share price, which doesn't tell you, by itself, whether the shares are still worth holding on to.

If you're going to be a successful investor though, it's crucial to find what works for you. This not only applies to deciding when to sell, but to every aspect of your investing strategy.

For me, there are just two good reasons to sell. One summarised in point three: a fundamental change. The other reason is simply that you need the cash!

Source: www.fool.co.uk