WHEN TO SELL
Investors seem to feel very comfortable with the challenge of finding stocks to buy. If you feel uncomfortable with the—lesser—challenge of selling, try using these guidelines:
Target Weighting - Set a target for the size of the average holding in your portfolio. Our average common-stock purchase is about 2% of an investment portfolio, and we later use that percentage as a benchmark. If the stock doubles to 4% of the portfolio, we’ll consider cutting back the holding, because our “bet” has just doubled.
Investors love a rising stock, but if you are in this situation and you don’t sell any shares, you’re making a statement that you think the company is twice as good as the others in your portfolio. If a double weighting is such a good idea, why didn’t you load up on the shares before the big run-up?
Competitive Position - Sell if your company’s competitive position has deteriorated, or you come to believe that your initial evaluation was flawed. This blinding bolt of inspiration is most likely to strike when your stock has just taken a licking. If the company has lost half of its earnings power but the shares are down 75%, you should be buying, not selling. And take note of the fact that this stock has shrunk to much less than 1% of your account . . . . .
Stop-Losses - Many investors use stop-losses, automatically selling any stock that falls 10% or 20% or some other predetermined figure. Do not even think of it. Your efforts to avoid the next Enron will cost you a small fortune, because stocks are volatile.
If you set your stop limit at 10% you’ll find yourself selling all your favorite stocks before they’ve had a chance to soar. Set it at 25% and you won’t sell as many, but you will get a lousy price every time you sell.
What do I do with the proceeds? - If now is a good time to sell, don’t get hung up on the question of “what am I going to do with the proceeds?” The yield on money market funds is often dismal, but that is not a reason to buy an overpriced—or even a fairly priced—stock with a big dividend. The difference in yield is inconsequential, because you're only planning to hold the money market fund for a few months while you look for a better alternative. And if the share price drops 20% (a very common occurrence for even the bluest of blue chips) you’ll wish you had kept the money under your mattress. Wait for a good opportunity. Or a great opportunity.