Friday, July 30, 2010

When to Sell: What Are the Right Reasons?

Books, newsletters, and seminars use millions of words teaching people how to select stocks and when to buy them. Selling is largely ignored or given lip service. I haven’t actually counted the words but in several investing books I own I can find references to selling in only about 10 of the 200+ pages.

This figure actually overstates the sell/buy ratio since each of the 10 pages containing references to selling stock has only a few lines about selling – roughly 10% of the page. 10% of 10 pages is one page equivalent out of 200+; less than 0.5% of the total pages.

Yet selling is just as important as buying. After all, for every share bought by someone that same share is sold by someone else – every time.

People sell stock for all sorts of reasons. Such as:

(1) Fear of losing money when the investment or the market is going down.
(2) Fear of losing money based on intuition.
(3) To lock in profits that seem “too high” or “high enough”.
(4) To raise cash for a personal emergency.
(5) To reduce portfolio risk as retirement approaches.
(6) To rebalance a portfolio in accordance with target asset allocations.
(7) Because the investment has risen to a target value.
(8) Because the investment has fallen to a “stop loss” price.
(9) Because the investment is “overvalued” or “fairly valued”.
(10) To raise cash for a “better” investment.
(11) Because their investment advisor recommended it.
(12) To raise cash for living expenses during retirement.

I’m sure there are many other reasons people sell their stock. These are just the ones that come to mind as I write this.

The questions for me are:

(1) Why have I sold stock?
(2) Why should I sell stock?

In the following series I’ll try to find my answers to these questions

Link to Topics in the Special Report: "When to Sell"

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