When Is The Right Time To Dump Disappointing Shares?

How long should you hold on to your ‘losers’?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A key strength of good investors is being able to handle disappointment and failure. In fact, no matter how intelligent, experienced and skilled you are at investing, mistakes are a cast-iron certainty. That’s because even the best investors cannot consistently and accurately anticipate all challenges that a company will eventually face and, while the risk/reward ratio may have huge appeal at the time of purchase, things always change in the business world.

The problem, though, is deciding exactly what to do with the shares that turn out to be disappointing. Clearly, they can fall into any number of categories, with examples being stocks that have plummeted to be worth a small percentage of their original value all the way through to companies that may be in positive return territory, but which have lagged their industry group or the wider index.

Warren Buffett seems to have a neat way of looking at disappointing stocks, stating that ‘should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks’. In other words, if the outlook for the company in which you have invested has changed significantly and things could get worse before they get better, selling up and investing elsewhere could be a sound move. Certainly, this may realise a loss (which is always painful), but it may mean that breaking even occurs much sooner.

Of course, deciding when to sell a sinking company can be tough. As such, a number of investors prefer to place a ‘stop-loss’ on their shares, which means that if their price falls by a set level (perhaps 10% or 20%) then they sell up and invest the capital elsewhere. This, on the one hand, is appealing, since it means that major losses are not experienced. But, on the other hand, it means the stocks that fall following purchase but then regain that lost ground before posting superb profit (which does happen surprisingly often) are sold far too early. Therefore, while a stop-loss may limit downside, it also limits upside, too.

An assessment, therefore, of a company’s future prospects appears to be a sound means to determine whether to sell up and move on. This, of course, can sometimes prove to be more of an art than a science. For example, a company may change its management team, refresh its strategy or make an acquisition that turns poor performance into much improved returns in future, with all three of these scenarios requiring an opinion and viewpoint rather than a cold, hard look at the facts.

As such, the decision as to when to sell disappointing shares appears to be a somewhat complicated one, with there being no ‘catch-all’ policy to be applied. Rather, it is through an ongoing, honest assessment of all holdings (good and bad) within a portfolio that an investor can begin to decide which are worth holding on to and which ones should be sold. As a result, being able to put the pain of losses to one side and act as if you are looking at the company for the very first time could allow you to make the most logical investment decisions. Certainly, mistakes will be made, but that just comes with the territory of being a successful investor.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »