Sooner or later every investor is disappointed. It could be a fund that cratered after years of stunning gains, or one that never took off as expected.
The question is: Is this just a temporary rough spot or a signal to get out? How do you know which results are luck, good or bad, and which involve skill, or lack of it, in the investment’s management or in your own choices?
“Humans are bad traders, says Michael Tanney, managing partner of New York-based Wanderlust Wealth Management. “The lizard part of our brain tells us the exact wrong time to buy or sell.”
Everyone wants investments that perform well, but experts say it’s dangerous to let fantasies take over. Should you pass up dating the girl or boy next door in hopes of landing a movie star? You’d risk ending up alone.
[See: 7 Ways to Shelter from a Trade War.]
Reading the signs is essential because no investment is truly profitable until the investor actually books the gains in a sale. Wait too long and the winner may crash and burn. But sell too soon and you could miss a turnaround.
Experts know from academic research that selling is hard to do. Getting out of a winner can seem like betraying a loyal friend. Dumping a loser means finally acknowledging a mistake. The pain of losing, the experts say, is sharper than the pleasure of winning.
Pros invariably advise keeping emotions in check and sticking with the original plan, and Tanney says it can even make sense to automate the process.
“Set a stop-loss order for every stock you own before you execute on the purchase,” he says, describing a sell order automatically triggered at a set price.
“My stop-loss is 20 percent,” he adds. “If the position I purchased drops by 20 percent, I’m an automatic seller of the entire investment, no questions asked, no favorites played. This is the only proven method to stop losses before they become a catastrophe. The same percent down has to apply to all your positions. Remember, don’t play ‘this one is different’ games. It’s rarely different.”
Advisors have a number of tips for deciding when to bail on an investment and controlling the urge to hang on too long. Here are a few of those mentioned most often.
Dig down. Sure, a price decline is worrisome, but a closer look at key data may be less discouraging — or more so. Are revenues growing even if profits are down? Are one-time charges responsible for a dip? Maybe a negative earnings surprise has shaken investors even though overall trends are good.
Remember that speculators may jump ship and drive down a price temporarily even if the investment is serving long-term investors pretty well. If the broad market is down 10 percent and your fund is down only 5, you’re actually going OK.
[See: 13 Ways to Take the Emotions Out of Investing.]
“Is it a loser relative to the market or its peers in the sector or sub-group?” asks Joel Salomon, a former hedge fund manager turned prosperity coach at SaLaurMor Capital in New York.
Colin B. Exelby, president of Celestial Wealth Management in Towson, Maryland, urges investors to bone up on technical indicators like relative strength index (RSI), moving average convergence/divergence (MACD) and commitment of traders (COT). Others mention earnings before interest, taxes, depreciation and amortization (EBITDA), price to EBITDA (P/EBITDA) and price-book value (P/BV)
“Sometimes, when those indicators reach extremes a reversal is imminent,” Exelby says, adding, “If the investment was based on fundamentals, has the story or rationale for investing in the first place changed? If the answer is yes, look for a strategic opportunity to exit the investment.”
Emmet Savage, CEO of Rubicoin, an educational investment application firm in Dublin, Ireland, suggests the investor “assess the current situation without price in mind. Ask yourself how the business is performing as opposed to the stock. If there are issues, what steps are management taking to address them?”
See what analysts and the financial press is saying and look at alternative investments.
Maybe another stock, bond or fund fits your needs just as well but without so many issues. Look around the same industry or category, assuming they still suit your long-term plan.
Think back. What were you thinking when you bought the investment? Experts suggest thinking back, and seriously considering getting out if the investment no longer meets the original criteria. Maybe the firm had a new product that looked promising. Has it sold like hotcakes after all? Has the crack CEO who appealed to you left?
Exelby recommends some soul searching: “Ask yourself the question, ‘If I never previously made the investment and I had the cash available today, would I make the investment again today?'”
Experts say that goes for winners as well as losers.
Savage says, “Ask yourself if you understand why this investment has underperformed. If you don’t know, the odds are you shouldn’t have been in that investment in the first place.”
Keep your eye on the target. If the goal is to save for college or retirement, you probably have a balance of risk and return considered suitable. So, if the portfolio as a whole is on track, does it really make sense to stick with a wild child that pushes your risk too high?
Savage urges investors to use their chief advantage over the pros — no board of directors or shareholders breathing down their necks.
[See: 7 Things That Can Derail Your Retirement Investing.]
“With that in mind, never let your emotions dictate your actions,” he says. “If you feel the need to sell right this minute, chances are you are in a heightened emotional state, probably brought about by some catalyst like a weak earnings report or negative headline. Take a day or two to reflect on your decision before acting. You may feel differently when you’ve had time to cool off.”
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3 Times When You Should Sell a Stock originally appeared on usnews.com
