When we talk asset management, most of my conversations focus on what
to buy, and sometimes when to buy it. These are difficult decisions
to reach. However, We never talk about when to sell an investment.
The sale of a security is at least as important as the purchase, since
the sale completes the transaction and is the only time we know if we
made or lost money. This decision is even more difficult to reach.
The sell decision is mired in complexity. Behavioral finance is
trying to ascertain the reasons for the difficulty in making the sell
decision. The research shows that everyone gets it wrong at least
some of the time. Everyone. Individual and professional investor
alike. In the July 2014 AAII Journal, Jack Schwager addresses the key
elements of investment failure. In essence, our emotions interfere
with our ability to stay objective. For example, most investors hold
on to a losing security for the hopes of recouping those losses, yet
they sell early when they make a winning investment.
At CIGX, we consider a variety of factors in our sell decision. We
consider the status of the overall economy, including trade and
investment, consumer spending, debt and interest rates. We also look
at corporate profits, earnings growth, and dividend programs.
Finally, we do look at minimizing losses and taking gains when
appropriate. We sell a security when the growth prospects are no
longer there. We may sell a security when earnings no longer meet
expectations, or when a dividend is canceled. A change in management
warrants close monitoring.
The are other reasons to sell. A better opportunity has arisen and a
security has to be sold to enable the preferred investment. The
investor’s need for cash is another reason to sell. Cash is an
important asset class and securities may have to be sold to rebalance
the portfolio. Finally, taxes may impact the sell decision. While we
would never not make money to avoid taxes, we could harvest losses to
reduce taxes or sell to avoid moving into the next tax bracket, which
may negate those gains.
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