The most important decision in investing

“Why don’t you ever tell me when to sell?”

It’s a good question – one I’m often asked. Though it’s not entirely true, I do concede I’m not quick to tell readers when to sell. Today I want to explain why that is. Moreover, I want to suggest how to formulate a ‘sales strategy’.

After all, selling is crucial – how else are you going to have the cash for all those other exciting investments we keep talking about?

Nobody knows your portfolio like you do

When I recommend a stock, I set out my reasons. I know why I like it – but you’ll undoubtedly have your own unique take on the situation and how it fits in (or doesn’t!) with your portfolio.

By way of example, let’s take the Close Brothers commodities fund I mentioned on Friday.

Originally, I recommended it because it was trading at a decent discount to its net asset value (NAV) and had exposure to some commodities I liked the look of. In fact, the way it’s set up, the fund promises double the return on its basket of commodities.

Now, even if you agreed with me and bought, you’ll have had your own unique reasons for doing so.

Maybe you’re a value investor. You saw the stock trading at a huge discount to the value of its underlying assets and couldn’t resist the bargain.

Or maybe your portfolio needed beefing up on the commodities side of things. You bought to bring your overall asset allocation into alignment.

Or maybe you liked the look of this stock as a speculative punt. Offering double the return on a set of commodities, this stock may well have provided the sort of trading opportunity you crave.

Now, the reason you got in will largely determine when you get out. Arguably, somebody that bought in January last year (at around 60% discount to NAV) should consider selling now that the discount is well under 10%.

But if you bought to gain exposure to the basket of commodities, then nothing’s changed. Stick with it. Only you can decide what to put in your portfolio. And only you can decide when to sell it.

But I will say one thing: you should formulate a strategy for timing your sell. I always say that buying is the easy part. But selling – well, that’s altogether more difficult. And that’s where you make the money…

Never be a forced seller

Short term traders generally know exactly when to sell. It’s a discipline – in fact, the sell order is often generated at the same time as the buy order. When the price hits a pre-determined level, the stock is automatically sold.

But long term investors are often ill-disciplined when it comes to selling. Far too often the decision to sell is what you might call ‘event driven’. That is, something happens and it causes a fundamental rethink.

More often than not, it’s bad news that gives the investor a jolt. Sometimes good news shifts the price up too – giving the holder an opportunity to cash in a quick buck.

But these events aren’t generally the best time to consider a sale. Quite often the rest of the market is thinking in exactly the same way as you. There’ll be a tidal wave of sales all coming at the same time. And the market is hardly likely to offer you a fair price in that environment.

I said at the start of this article that it’s not entirely true that I don’t tell readers to sell. In fact, having recommended the IPO of Supergroup back in 2010, I suggested holders take some money off the table as the stock approached £15.

I recommended readers cash in a third of their holding. A few weeks later I got an email from an old mate along these lines: “Hey, Super’s nearing £18 – we were too quick to sell!”

Nonetheless, it was the right decision. Not long after hitting its highs, the stock started to falter – it had its very own annus horriblis. The stock was below a tenner when I saw my old mate at some function: “Why on earth didn’t you tell me to sell them all!”

Aaaargh – now you see the problem with giving advice on selling!

Nonetheless that case offers two useful points.

First we must always consider selling a stock. Especially ones that are doing well and we’ve fallen in love with. Remember, at this point other investors are feeling the same – it’s at this time we’re likely to be offered a keen price.

Dr Mike Tubbs doesn’t have much of a problem with it though. He’s sold out for some huge gains in the last few years. And now his excellent R&D newsletter is on a trial offer for just a quid. There’s always a catch though – the offer closes in just over a week.Click here to read how his stock picking service trounced the record of some of the world’s most famous investors.

Simple rules for better selling

How you trim your portfolio is up to you. Some readers will monitor positions daily. That’s fine, but staring at a trading screen and making off the cuff decisions on sales is a bad idea. I recommend taking a printout of your portfolio on a monthly basis and considering your options. Look at the overall complexion of your portfolio and consider why you bought each stock. And if you’re a really disciplined investor, you’ll have taken my advice and kept a log on each stock in your portfolio.

Your log should record why you got in, and what you’re looking to achieve. And if you decide to trim a holding, it’s important to log your reasons too. When you come to looking back on your notes I’m sure you’ll find it fascinating. It’s a great way of understanding your own inner-most workings.

The second important point is that this needn’t be an all-in or all-out decision. I like to trim my holdings in thirds. That way I always seem to be right…

You see, if the stock goes up, then I’m happy to still have two-thirds riding the up-wave. If the stock falls – well, then I’m just pleased to have taken some money off the table.

Today’s low trading commissions allow you to sell in dribs and drabs without giving too much away to your broker.

When it comes to knowing when to sell, you’re generally alone. And that’s how it should be. Your portfolio is unique and you’ve built it that way for a reason. Making a ‘non-event’ (ie unforced) sell will likely catch the market off-guard. If everyone else is buying, then that’s a good time to get a decent price for your stock.

The most important thing is to print that portfolio off. Relax in a big comfy chair with a nice glass of wine and contemplate. Don’t worry about what to do with the cash… we’ll find plenty of places for that!

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

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2 Responses

  1. 10/12/2012, Dave H wrote

    As a fairly novice investor, this was one of the most interesting and useful emails I have received from ‘The Right Side.’

  2. 12/12/2012, penny stocks wrote

    hi, good post . really good question decision of investment of money is tricky. So we must do planning for secure investment before that we have to collect all information regarding risk factor in investment . i read post on pennystockdetectives.com according to author US economy is volatile , so be alert and after well plan do investment.

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