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• Is it Time to Sell Knowing when to get rid of a security requires strategy

Is it Time to Sell? Knowing when to get rid of a security requires strategy

written on October 28, 2011 by Frank Fantozzi

 

Selling is essentially a negative decision — in a sense, it’s turning our backs on an investment we formerly liked. So if an investment is doing well, the tendency is to want to stick with it to see if it does even better. If the investment is doing poorly, the inclination is to hang on until it is at back to breakeven before we consider dumping it. 

Both of these scenarios can turn out badly. In the first case, what if, instead of continuing to rise, the security’s price begins to fall, perhaps even sinking below your original buy level? And hanging on to a loser until it returns to breakeven can be a dangerous game. So when is the right time to sell?

Reasons to say goodbye
Selling on a hunch generally is not a good idea. Emotion based investing leads to compounding bad decisions.  What are the alternatives? In truth, most investors are better off not buying and selling frequently. For a long-term investor, there may be only a few reasons that would justify selling.

Perhaps the most clear-cut reason to sell a security occurs when the fundamental condition of a company deteriorates. For instance, think about cell phone manufacturers.

Some previously successful companies fell behind in the Smartphone race, losing significant market share. If you hold stock in such a company, you may still like its performance prospects — especially at a lower per share price. But you need to consider the company’s changed competitive position when deciding whether to continue owning the stock.

Alternatively, some investors focus on stocks with increasing dividends. If a company suddenly stops boosting its dividend, that would be a warning sign. In such cases, the original reasons you bought the security no longer hold true.

An analogous situation can occur with mutual funds. Suppose you buy a fund to take advantage of a particular manager’s expertise. If that manager leaves, and it’s unclear how much continuity there will be when the new manager takes over, it might be time to jettison the position. That said; do not pull the trigger until you find out the details of the change. Some funds have a team approach and a relatively stable management philosophy.

Lastly, if you had cash today and wanted to invest, would you buy the security you are contemplating holding?

Rebalancing your portfolio
Another reason to sell might be to rebalance your portfolio. For example, suppose you’ve settled on an asset allocation of 60% stocks and 40% bonds. If the stock market advances smartly, pushing your allocation to 65% stocks and 35% bonds, your portfolio is now riskier than it was originally intended.

So you might want to sell some stocks (reaping the gains) and increase exposure to bonds to rebalance and get your allocation back to 60%/40%. Keep in mind, though, that in taxable accounts you benefit from a more favorable tax treatment of gains if you have held the investment for more than a year.

Seek advice before making a move
Selling securities should be done only after careful analysis. Your advisor can help you determine whether you should consider selling a particular security whose prospects may have changed or, if you need to sell some investments to achieve other goals, which securities are the best candidates.

Selling in tax-deferred vs. taxable accounts
Because of their tax-favored status, retirement accounts provide more flexibility in rebalancing your investments. A good rule of thumb with such an account is to rebalance once a year, using some combination of purchases (with new funds from annual contributions) and sales to bring your portfolio
back to your target allocation.

Rebalancing in taxable accounts can be more difficult because of the tax liability created by selling profitable positions. If capital gains will be substantial, consider waiting until you can combine rebalancing with fund flows that might be occurring for other reasons.

For example, say you need cash from your investments to pay for your child’s college tuition. If at the moment your portfolio is heavy on stocks relative to your target allocation, try to coordinate your selling so that you bring down the stock percentage in your portfolio. If you have any questions about your investments or need a second opinion, please contact Frank Fantozzi

Frank Fantozzi can be reached confidentially at 440-740-0130 x222 or by E-Mail at Frank@PlannedFinancial.com. He is President of Planned Financial Services and has been a requested financial lecturer on numerous financial topics.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Securities offered through LPL Financial. Member FINRA/SIPC.