When to Sell an Investment – Morningstar.ca

“You’ve got to know when to hold and when to fold,” according to the famous country and western song, The Gambler.

Kenny Rogers was talking about poker, of course, but knowing when to sell is one of the crucial facets of investing that marks out the amateurs from the pros in investing. It’s also one of the hardest decisions an investor has to make, not least because it often means you’re admitting you’ve made a mistake.

We look at five reasons why you might sell an investment – and hopefully make the process easier if you to decide to hit the button.

1) Something Fundamental Has Changed
In the internet age, there’s a lot of “noise” about companies hitting investors every day: a chief executive quits, a scandal emerges, or there’s a profit warning, a rights issue, a dividend cut – the list goes on. It’s often hard to ascertain whether an announcement is a one-off or symptomatic of deeper problems.

Some recent corporate failures (for example, Toys R Us or Carillion) have involved multiple profit warnings over a number of years, which could signal potential exit points for an investor.

Often companies are so associated with certain individuals (Elon Musk at Tesla (TSLA), Steve Jobs at Apple (AAPL)) that any change at the top can spark fear in investors. When Steve Jobs stepped down from Apple in 2011 due to ill-health, for example, some analysts thought the company would struggle to match its previous success – the share price is now 10 times higher.

This is also pertinent for fund investors. If you’ve followed a star manager for years and he or she quits, whether to a rival or to set up shop on their own, you may choose to follow the manager to their new home. Of course, some companies and fund houses have better succession plans than others, so this “follow the leader” approach may be less effective over the long-term, and some star managers have found life rather harder outside of big institutions.

Should I Sell? 
A fundamental change is a time to take stock and reassess an investment but it’s not an automatic sell signal. 

2) Your Own Strategy Has Changed
Investor goals change over time according to where they are in their life cycle, their attitude to risk and financial circumstances. Racy growth funds and stocks bought in your twenties may no longer be appropriate in your sixties, a time when people traditionally start moving down the risk scale.

Portfolios can change drastically over time as you add more to them and some stocks and funds perform better than others. You might have started off with a 10% exposure to tech, for example, but that has ballooned to 50%.

Sometimes investors take too little risk for their age and financial circumstances; and as you get more experienced at investing, you may want to ditch that vanilla tracker fund in the pursuit of higher returns. Or a financial adviser may, after looking at your retirement plans, argue that you need more equity exposure to meet your goals. A windfall, inheritance or promotion could put you in a better position to handle volatility than when your first started investing.

Should I Sell
It’s always good to step back and take stock of your financial situation and revisit the investment goals you had when you started out. You could think of the process more as “rebalancing” rather than “selling”.

2) It Keeps Underperforming
At Morningstar we encourage investors to take a long-term approach. One year’s poor performance figures isn’t always a sell signal. But after a long period of sub-par performance, your patience may run out.

For an active fund investor, the failure of a fund to beat the index over three years could be a reliable indicator to bail out. Or the fund could consistently come at the bottom in its category, meaning that rival funds have outpaced it. It could be that the investing style is out of favour, or it could be that something is intrinsically wrong with the process.

Poor fund performance often sends investors heading for the exits, something Morningstar monitors every month. Indeed, several high-profile managers have lost their jobs in recent years and fund outflows proved a reliable early indicator of investors losing faith. Fees are also a factor here – perhaps you were happy to pay above average fees when the fund was on a hot streak, but now they are starting to look uncompetitive when it’s putting in a sub-par performance.

Should I Sell?
An investment can’t be a top-performer over every time period but a sustained period of underperformance should be a signal that it’s time to look at why the stock or fund is consistently lagging its peer group and whether an alternative could serve you better.

4) Or, it’s Been Outperforming
You may have been fortunate or wise enough to spot a future star such as Tesla and Shopify (SHOP) in the early stages and have seen the value of your holding grow hugely as a result. If you’d bought Tesla shares a year ago, you’d be up more than 800%. 

At such times it can make sense to cash in some chips. The conventional wisdom is to run your winners for as long as possible, but from a portfolio perspective, a share price that has doubled or more can cause its own problems. For example, it could skew the risk profile of your portfolio as the successful holding grows in size. 

Morningstar’s Christine Benz has some housekeeping tips here. Known as rebalancing, reducing your holdings in a fund or stock holding that’s done well releases cash that can be put to work elsewhere. You still have a stake in your existing holdings so if they keep outperforming, you continue to benefit. 

Should I Sell?
Past performance is no guide to future performance, the investment adage goes, so taking some profits can be a wise strategy after a stellar run. But that doesn’t mean you have to sell your entire holding.

5. You’ve Inherited Some Shares
Your relatives may have left you some shares or funds as a bequest. Perhaps they were talented stockpickers or maybe they left you some duds that you wouldn’t dream of owning yourself. Either way you can revisit point two on our list and ask – does this stock or fund fit with my own investment plans and even ethical beliefs? And do I have confidence in the fund manager or company to outperform in the future?

Point four also comes into play here – if your relative has done exceptionally well out of the investment, perhaps it’s time to cash in? There may even be future capital gains tax implications in hanging on to the shares that you’d rather avoid so seeking professional advice may be useful in this situation.

Should I Sell?
Sometimes the simplicity of cash beats the uncertainty of shares – with an inheritance it’s often helpful to know exactly what you will get so you can plan what to do with it.

How to Sell
So far we’ve looked at why you might sell but not how. So what happens if you do decide to hit the button? Here are some tips:

1) Selling in tranches can reduce the risk of mis-timing the market. Just as you would drip-feed money into the market when buying, you could take the same approach to selling. You need to stick to this plan, especially if market conditions are unfavourable at the time you have scheduled to sell. 

2) Emotions can be the enemy of investors, especially when fear dominates as it did earlier this year. A market rout, when shares are posting big daily moves, is probably not the best time to get a decent price for your shares or funds. Often the market moves so quickly that it is easy to be left behind in the stampede to sell. It’s worth remembering that any falls in the value of your holding are only “paper losses” until you actually sell and it could be that your holding recovers and you get a better price by waiting to trade.

3) Practice makes perfect: the first time you ever sell it can feel like an irreversible decision. But experience – and making some mistakes along the way – can make you a better investor. Because most stock markets are reasonably liquid, you can always buy the stock or fund again if you’ve changed your mind, and this is something the professionals frequently do.

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