It’s the individual stock investor’s conundrum: when do you finally pull the plug on a stock that’s done nothing?
First, there’s an easy answer: don’t invest in individual stocks. By sticking with exchange traded funds or mutual funds you’re relieved of these decisions and someone else (or an algorithm) decides when it’s the right time to cut the cord.
But what about your mutual fund or ETF? At some point you’ll have to decide when to sell those positions, also.
I follow these mental steps when deciding to pull the plug a position:
1) I first admit to myself that I know nothing and that whatever move I make in the financial markets will be the wrong one….if I’m looking at timing. Everyone wants to find the best “time” to cut the cord on an investment, but most of us haven’t given up on being able to predict the future. We can’t. Therefore, we’ll never know when the “right” time is going to be.
Once you let go of the “I CAN time the market” illusion, you begin making better, more careful decisions. You realize that financial markets are unfriendly and unsafe…and you start making decisions based on your goals instead of based on market prognosticators.
2) I look at my goals and the length of time until the goal. If I have a position that’s 100% stocks and my goal is three years away, I’m too close to landing the plane at the airport for that kind of turbulence. If I’m still ten years away from the goal, there’s no reason to make drastic changes.
3) I compare my investment to others in the category. If I own a good American fund and I’m thinking of switching to a Fidelity index fund in the same category, there’s no reason to make that switch if my American fund is performing. All I’m doing is increasing complexity and maybe incurring some unnecessary tax hits.
We get caught up in what others say about our investments too often. Pay attention to your own investment strategy and whether you’re reaching your goals…isn’t that what’s most important?
4) I ask myself if a stop loss can sell off the investment. I prefer, like everyone, to sell when an investment is declining in value. Therefore, stop losses are fantastic. When I’m ready to sell (assuming I don’t need the cash tomorrow), I’ll set a stop loss and gradually raise it as the investment continues to appreciate. When it declines, I’ll sell.
I know that using this method I’ll never sell at the “tippy-top” but let’s revisit point #1 above. Do I really think I can predict the future? If I can’t then why do i think I can pick the ultimate time to sell?
5) If I can’t use a stop loss because I either need the cash now or the position is a mutual fund or real estate investment, I’ll have to make a decision based on the information I have about my own situation and my need for capital. Rather than evaluating financial markets that are out of my control, I’ll focus on the best use of a dollar. Here’s how that works: I’ll ask myself, “If I take this money out of this investment, do I think the place I’m putting my money will make it appreciate more quickly OR can be used in a way that helps me personally more than this investment? If the answer is yes, then I just pull the trigger (once again….sure that I’m probably picking a horrible time to sell).
For me, the biggest key is to not second guess myself. Sure, MSFT is a stock that I’ve always thought was good, but the time to switch made sense. I purchased YHOO with my MSFT dollars and haven’t looked back….except when I read Matt Krantz’ piece that seems to be yelling out to me about how I should have maybe stuck with it a little longer….
Photo: Trading Academy