Diversity Investment Group When to Sell

Selling Your Stock for the Right Reasons
by Joe Pulizzi, ICLUBcentral Inc.

Every time I think about selling a stock, I think of Eddie Murphy in Trading Places (I highly recommend that movie if you haven't seen it). Eddie's character gets so excited in the heat of selling a commodity that he yells out "Sell, Sell, Sell." If only we were selling for millions of dollars. With our clubs, the selling is usually over a few hundred to a few thousand dollars. Whether you sell to capture millions of dollars, or fifty bucks, the decision to sell should not be taken lightly.

Even buy-and-hold gurus know that there are times when selling is necessary. Let's look at a few.

According to the BetterInvesting, there are four reasons to sell your stock unrelated to the stock's performance.

1. To reap the rewards of long-term investing (to buy a house, fund an education, start a family, etc.).
2. Cash is needed for a departing member.
3. Selling for income tax purposes. Selling a portfolio loser can offset a huge profit.
4. Selling to maintain diversification. If your club is lucky to find a high-flyer, you may need to sell a portion of your holdings if that stock accounts for more than 20% of your portfolio. Also, if your club maintains a diversification of company sizes, you may need to sell on occasion to keep your portfolio diversified (i.e., Dell in 1992 was a small-cap. Now it is a large-cap stock. Should you adjust your portfolio?). Note: Small-cap stocks are generally considered to have market capitalizations less than $1 billion. Large-cap stocks have market capitalizations greater than $10 billion.

On a performance basis, the BetterInvesting lists several factors to consider when selling a stock.

1. Company's management changes and your club believes it is not good for the company or the stock.
2. Sales or earnings are noticeably slowing/Profit margins are declining. This can be a warning sign of things to come. If the company you own releases poor earnings, be sure someone in the club does research on why.
3. The company takes on too much debt, which may affect margins and leverage.
4. Increasing competition is taking away the company's market share. This is very important. Remember what Dell did to Compaq.
5. The company depends too much on one product. Remember, companies need to diversify just like our club portfolios.
6. Economic conditions severely threaten the company. If gas prices were going sky-high with no sign of going down, would you want to invest in an airline stock, trucking company?
7. The return of the stock is no longer compatible with your club philosophy. If your club's goal is to make 15% per year, and the company you own now grows at 5%, it will be very hard for that company's stock to move more than that.

If your club has noticed one of these factors in a company you own, be sure to go back and find out why the club originally bought the stock. That should give you some perspective. Good luck!

If you have questions or comments, write to: DIGnet@mindspring.com.

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