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discipline -- when to sell

One of the most difficult decisions to make is when to sell an investment. As the adage says, "Buy Low & Sell High", but when is the right time to sell?

Individual Stocks^*

For example, you purchase ABC Company stock for $30 per share. You decided to purchase the stock because you have done your due diligence and believe the fair market value based on historical growth, projected growth, financial ratios, industry ratios, etc. is $45. You plan on selling when the stock hits $40.

ABC stock goes down to $20 in a matter of a few days. No relevant news has been released nor has there been for its major competitors, customers, or suppliers. What do you do? Sell, buy more and average down, hold tight, sell covered calls, buy LEAPS, hedge your position, develop a market neutral strategy, a combination of the above, none of the above, or something else? As you can see, you have many decisions to make based on the information you have available to you. If you trust your research and believe the original price of $30 was worth it, then at $20 the stock should look even better! Why doesn’t that always hold true? Because we are human and begin to doubt, maybe rightfully so, that our research was flawed and someone else either has more knowledge about the stock or has done a better job at valuing the company than we have.

ABC stock goes up to $40, but you feel the stock has done well and warrants an even higher price so you raise your target to $50 for the coming twelve months. The stock price then falls back to $30 and you have wasted an opportunity to sell and make a profit. How do you feel now? Probably kicking yourself for being greedy and not sticking to your original decision. Again, this is an entirely human reaction.

ABC stock goes up to $40 and you sell, glad to see the stock met your target and you pocket the profits after giving Uncle Sam and your State government their piece of the pie. The next week, ABC stock is then taken over by XYZ company for $55 per share. How do you feel? Again, a human would be kicking themselves for selling too soon and not having the patience to see if the stock would reverse its up-trend.

Most successful investors take the emotional aspects out of the equation when buying and selling investments. The right time to sell is when you sell, so don’t look back. Each investor should set a target and sell price on their investments at time of purchase. These prices will rise and fall depending upon many factors over time. Have a sell discipline and stop competing with yourself.

Mutual Funds^*

Developing a Mutual Fund sell discipline is completely different than for individual stocks. You purchase a Mutual Fund based on the following reasons (hopefully):

The manager’s track record
Consistent investment style
Low expense ratios
Good risk/return ratio
Consistent performance
Tax implications.

In a nutshell, you sell when one of the above reasons doesn’t hold true any longer. In addition, you should consider selling your fund if the fund manager leaves or if you will need your invested money to spend within three years.

The founders of Richest Capital have helped many investors develop an Investment Policy Statement and Buy and Sell disciplines. If you would like help on creating your Investment Policy Statement or Buy and Sell disciplines, please email W. E. MDirector1 or B. D. MDirector2

^* W. E. MDirector1, B. D. MDirector2, and M. J. MDirector3 are Registered Representatives of and offer securities products and services through RAA.com Member NASD/SIPC, a registered broker-dealer. In this regard, this communication is strictly intended for individuals residing in the states of Arizona, California, Colorado, Georgia, Illinois, New Mexico, North Dakota, Texas, Tennessee, and Wisconsin. No offers may be made or accepted from any resident outside the specific states referenced.

IMPORTANT CONSUMER INFORMATION:

A broker-dealer, investment adviser, a broker-dealer agent, or investment adviser representative may only transact business in a state if first registered in that state, or is excluded or exempt from registration in that state as a broker-dealer, investment adviser, broker-dealer agent or investment adviser representative, as appropriate. Follow-up, individualized responses to persons in a state by such a firm or individual that involve either affecting or attempting to affect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without first complying with appropriate registration requirements, or an applicable exemption or exclusion.

For information concerning the licensing status or disciplinary history of a broker-dealer, investment adviser, broker-dealer agent, or investment adviser representative, a consumer should contact his or her state securities law administrator.

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