Diversity Investment Group When to Sell

When Should I (or My Club) Sell a Stock?
by Douglas Gerlach, ICLUBcentral

Knowing when to buy or sell the stocks in your portfolio is often a difficult decision, whether it's your club or personal portfolio. Here are some guidelines that might help you out when you're faced with the daunting decision about whether or not to sell a stock you own.

In no particular order, you should consider selling a stock in your portfolio whenever any of the following conditions exist:

• You need the cash. Sure, you're saving and investing for the long-term, but if a need arises and you need cash today (perhaps for college tuition for your kids, or to buy a home, or to pay off a debt), consider tapping into your portfolio to raise the funds.
• You have found a better potential investment, either with a higher level of quality or with a better projected total return. Selling a stock to upgrade your overall portfolio is usually a smart choice. Just be careful to consider the effect of any applicable capital gains taxes and commissions in your decision to replace a stock.
• You need to rebalance your portfolio, either by size of company or industry. BetterInvesting suggests that investors maintain a balance of small, mid-sized and large companies in their portfolios, along with stocks from many different industries. Investors who followed this guidance and didn't let technology stocks become overweighted in their portfolios didn't see as much damage to their portfolios in the tech crash back at the turn of the century.
• The stock is vastly overvalued. Many BetterInvesting pundits recommend that stocks be sold if their current P/E ratios are much higher than their historical average P/E ratios, specifically if the stock's relative value is 150% or higher. These stocks typically don't have much of an upside, but plenty of downside.
• There is an adverse management change, such as the departure of a dynamic CEO or founder of the company, particularly if those individuals were driving forces behind the company's success. When these kinds of changes occur, a company's past history may not tell you much about the company's future.
• The company is facing declining profit margins, perhaps from increased competition, in three to five consecutive quarters. Looking at the PERT, you can identify stocks that are experiencing degradation in their profitability and thus are good candidates for selling.
• If a stock has significantly declined in price from the time of purchase, you may want to sell it in order to take a tax loss and thus offset any other capital gains that you have incurred in your taxable portfolio. You can always consider repurchasing the stock in 31 days (to avoid having the loss be wiped out by the wash sale rule).
• If you have a member withdrawing from your club, considering selling a stock that you're holding at a loss in order to raise cash to pay off the member. Again, you can consider repurchasing that stock in 31 days if you believe it has long-term merit. Remember, though, never to sell a stock that you're holding at a gain in order to pay off a departing club member -- in this case you should transfer the appreciated stock to the member so that the club can defer recording capital gains on the shares.

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

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