Tuesday, 23 June 2009

The most difficult decision - when to sell

The most difficult decision for an investor isn't deciding which stock to buy, but deciding when to sell.

"You can be right about a stock's potential, but if you hold on too long, you may end up with nothing."

Many experts give detailed advice on how to buy stocks, few give advice about when to sell, despite the importance of that decision.

Discipline plays a key role in any selling strategy.

- One problem investors run into is that they fall in love with a winning stock and hold onto it too long.

- Many investors also fear that they will sell winners too soon and miss out on even greater gains.
  • "Instead of groping for the last dollar, you should gladly leave some upside on the table. Catching market tops is not your game. This is preferable to getting caught in a subsequent downdraft."

There are two main reasons to sell stocks:
  • deterioration in the stock's fundamentals (particular in its earnings estimates or five-year growth rates), or
  • the stock's price approached the firm's expectations. You can devel0p these price expectations for each stock you own, using earnings estimates, and the projected expansion of the stock's PE ratio. These targets should also be adjsuted based on market climate.

One of the most important things an investor can do is stick to a firm selling strategy - whatever the details of that strategy may be.

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