FOOL SCHOOL
When Should You Sell?

March 4, 2002

This innocent little question seems to trouble investors more than anything else, but it really shouldn't be that difficult. The simple answer is that, just as for when to buy, you sell when your strategy dictates that you should sell. For most people, this means that you sell when the opposite conditions apply as to when you bought.

Most of the confusion about selling decisions stems from the idea that you need, at some point, to take profits (or settle for a loss) in a share that you've bought. For instance, some people will "take half out" of an investment when it has doubled, so that the remaining shares are "for free". Others will sell their entire holding in a share when it has risen by some targeted amount.

On the other side of the equation, you will hear of people selling an investment if it falls by a predetermined amount. This is called a stop-loss, and the idea is that it prevents you taking further losses on any particular share. Make no mistake, though, a "stop loss" does not stop losses. It just means that you sell a share when it's fallen by a pre-set amount. That's not the same thing at all. Sure it means that you won't lose any more money on that particular share, but why is that share any more likely to fall than the one that you move your money into next.

For most long-term investment strategies, none of this makes any sense. Our aim is to get long-term exposure to the stock market and we want our share portfolio to be full of the best value shares that we can find, subject to having a reasonable spread of them. Logically speaking, we should be selling shares if they no longer look as attractive as something else (which we'd buy instead) or if they've gone up (or everything else has gone down) so much that we felt that one share made up too much of our portfolio. The actual amount that any particular share has gone up or down shouldn't make any difference. At a given point in time, the crucial question is "is this the best use of my money or would I be better off moving it into a different share".

There is, however, one crucial rider to all this. Selling a share and buying another costs money. If you do it too much, then you'll put a large dent in your investment returns. In fact, it has been estimated that around a third of stock market returns are lost to investors because of the costs of investing. Don't boost these figures!

The market sets what it believes is a fair price for a share and it tends to do this pretty accurately. For you to think that another share represents better value, you have to think that the market is getting it wrong about one or both of them. One of the biggest problems that investors tend to face is overconfidence so, before you switch from one investment to another, ask yourself whether it's really worth the costs of doing so. If you think it is, then take some deep breaths and ask yourself the same question again. If you have any doubts at all, then it's generally going to best to do nothing.