Diversity Investment Group When to Sell from the Investor's Toolkit software manual

The Stock Selection Guide and the Stock Comparison Guide are the only tools you will probably need for stock selection. With them, you should be able to pick four winners out of every five stocks selected-assuming that you use these tools conscientiously and conservatively. Selection isn't all there is to successful investment, however. The job is only half done.

Presumably by now, you have already selected and have likely purchased a number of stocks. It's now time to look at the "Sell" side-or at least to consider what happens after you own your stocks. This is where many investors begin to lose interest and fall by the wayside in their discipline. This is also the place where their track record can easily founder.

Portfolio Management is the art of continually improving the quality of your portfolio in order to maximize your return. You do this by:

1. Watching the performance of the company rather than the stock.
2. Selling a stock only when the company shows significant signs that it will not produce the sales and/or earnings growth that you expected when you bought it, and
3. Replacing the stock you've sold or intend to sell with one of equal or better quality having a
   better potential for return.

It is not:

1. Selling stocks that perform well . . .while keeping those that don't . . .in the hopes that they will. (Why sell your winners in hopes your losers will turn into winners? You'll wind up with a portfolio full of losers!)
2. Letting price and P/E performance influence your decisions about selling.

Portfolio Tracking, Performance Measurement, or Record Keeping are often misconstrued as portfolio management. They are, in fact, only ways of keeping track of how well you have managed your portfolio.

When & Why to Sell

There is really no "time" to sell; however, there are certainly reasons to do so. Most investors, less successful than you will be, believe that you should watch for the price to rise high enough-whatever that means-and then sell it to take your profit. BetterInvesting investors know that "profit taking is often profit losing."

BetterInvesting "Rules" for Selling a Stock

The first rule for selling is . . . don't!…

…unless:

• an issue of equal or greater quality offers more gain prospects on the upside and less risk on the downside.
• the company has had an adverse management change.
• profit margins are declining or the financial structure is deteriorating.
• direct or indirect competition stands to affect the company's long-term prosperity.
• a company's success is too dependent upon a single product whose cycle is running out.
• you must, in order to maintain adequate diversification.
• the company is in a cyclical industry and the cycle is about to start down.
• the stock is way overpriced (at least 150% of the five-year Average P/E) and the company's earnings are growing at 10% or less. Even then, you might consider holding-or selling only some of it.

Note that, of the eight reasons for selling listed above, only the eighth suggests that you might sell to take a profit-and then only if: a) the price is way above average; and b) the company is growing at 10% or less (relatively slowly).

Six of the rules call for chucking losers. The seventh one calls for replacing a stock with a low potential only when you can find one as good or better with a greater possible return.

The Investor's Toolkit contains a complete arsenal of tools for evaluating the performance of the companies in your portfolio and helping you manage it effectively:

• PERT (Portfolio Evaluation and Review Technique)
• Portfolio Trend Report
• PERT Worksheet-A
• Portfolio Management Guide

Investor's Toolkit SSG software is a product of InvestWare Corporation, Davie, FL 33325

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

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