Despite the fact that it is more than ten years since the FTSE-100 index was at its all time high, the last decade has presented plenty of opportunities to make money by buying and selling shares.
Many of our clients are actively interested in the stock market. We’ve therefore put together what we hope are some useful pointers on perhaps the most important question of them all where shares are concerned: when is the best time to sell?
First of all, regular reviews of your share portfolio are important. We’d suggest doing this at least monthly, and there are now excellent software packages available which will help you keep track of your portfolio and provide you with detailed analysis of the shares you own.
The text book approach to selling a share is straightforward. You ask yourself a simple question, “Would I buy this share today?” If the answer is ‘no,’ then you should sell it. But real life isn’t like that. A better question to ask is probably, “Does this share still represent good long term value, and does it still meet the overall aims of my portfolio.” Even the best companies go through temporary blips and – especially in times like the present – the occasional set of results can be disappointing. If you feel that it’s just a one-off and the share still has good long-term prospects, it’s probably worth forgiving a temporary setback.
If you are thinking of selling a share – particularly if you’re thinking of switching to a company in the same sector – it is important to remember the buying and selling costs of the transaction. Although online share dealing has helped to drive down the cost of buying and selling shares, you still need to take it into account – and it can sometimes make you think again.
Remember too that good performance in difficult economic conditions doesn’t automatically mean a stellar performance when the economy improves. For example, many discount retailers are doing well at the moment: whether they will continue to do so well when the economy improves and the ‘squeezed middle’ returns to traditional shopping patterns is open to doubt.
Above all, don’t get emotionally attached to shares. You may have done very well with a particular share in the past. That’s great. But that doesn’t make it your friend and it doesn’t mean you have to stand by it if it starts to tumble downhill. No share is your best friend. Similarly if a share falls sharply in value there’s almost certainly a good reason. Don’t make the mistake of thinking that a particular share “owes you money.”
So how do you take the emotion out of deciding when to sell a particular share? Some investors like to have a ‘trailing stop-loss’ in place and there is a lot to recommend it, as applied rigidly it takes the decision out of your hands. You might, for example, decide to sell a share if it falls by 20% – so that if you buy at £10 then you will automatically sell the share if it falls to £8. Should the share rise to £15, then your ‘trailing stop loss’ is raised to £12, so that if you sell the share at this level, you have at least locked in an overall gain of 20%.
A stop-loss certainly helps to keep losses to manageable proportions – and meets the old stock market adage, ‘run your profits and cut your losses.’
Your final decision on when and whether to sell a particular share will almost certainly be a mixture of your ‘gut-feeling’ and arithmetic. And it’s important to accept that you’re not going to get every decision right. Even the legendary investors like Warren Buffet make mistakes. None of the highly paid fund managers in the City get every decision right. You’re no different. Sometimes you’ll sell a share for all the right reasons and it will immediately rebound in the opposite direction. You wouldn’t be human if you didn’t think “if only I’d held on.” But if you made the decision to sell for sound, logical reasons you’ll be right far more often than you are wrong.