|Course 303: When to Sell an Investment|
|Good Reasons To Sell|
Of course, it’s unlikely you'll hold most investments forever. You will need to sell investments from time to time. Just make sure you're selling for a good reason--and your reason should stem from your own investment philosophy and your investment-selection criteria.|
The fundamentals of the investment change.
It's often tough to distinguish between the normal fluctuations of a company's stock price or a fund's performance from long-term shifts in fundamentals.
Let's say that because of a change in foreign-exchange rates, Coca-Cola KO earns a little less than analysts had expected in a given quarter and the stock's price takes a licking. Who cares? The company's long-term prospects aren't damaged.
Maybe you own a stock because the company is growing rapidly. But you find out about accounting irregularities at the company, which pull the rug out from under profits. You may still want to own the stock, but only if you're interested in turnarounds. It's no longer a growth stock.
Let's take an example. Suppose a bond fund loses more than 20% in a year in which its average peers suffer a much slimmer loss because it had made a big bet on emerging-markets debt. Shareholders who thought they were buying a boring multisector bond fund had every right to sell. They'd made a mistake.
The investment becomes too expensive according to your criteria.
For most investors, however, mutual funds don't become "too expensive" the same way stocks do. That's because fund managers are (theoretically, at least) selling the fully valued stocks in their portfolios and replacing them with better opportunities. They're defining what "too expensive" means, and they're weeding out pricey stocks based on their criteria.
We cover how to rebalance a portfolio in Portfolio 305.
When too-good-to-pass-up opportunities arise, it may make sense to sell some of the least-compelling parts of your portfolio to fund the purchase. Just be sure that these opportunities are well thought-out and investigated, that they fit your long-term investment goals, and that they meet the investment selection criteria you laid out in your Investment Policy Statement.
Before pulling the sell trigger, be sure you're comparing your underperformer to an appropriate benchmark, such as its Morningstar category, its industry peers, or a suitable index.
Also, be sure that your investments continue to meet the other investment selection criteria in your Investment Policy Statement. If they don't, they may be sell candidates.
Your investment goals change.
Suppose you start investing in a balanced fund with the goal of buying a house within the next five years. If you get married and your spouse already owns a house, you may decide to use that money for retirement instead. In that case, you might sell the balanced fund and buy a pure stock fund. Your goal and the time until you draw on your investment have changed. The investment should, too.
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