When Is the Right Time to Sell?

One of the toughest decisions facing an investor is when to sell.

Buying is fun. It's like going to the mall. It's exciting to see something you like, to examine it for a while, then to make a decision and bring it home with you.

But selling doesn't usually happen that way. It can come at a time of extreme disappointment. Or it may come at a time when an investment has done quite well, and it therefore may be hard to part with it. It also can cost money in commissions and taxes.

But even though I encourage people to hold on to their investments for the long run, sometimes investors ought to sell. Here are some of those times.

First, investors must periodically re-evaluate not just their investments, but their investment goals. These goals normally change as we age or as other life circumstances change. Our investments should change with them.

For example, a young investor who is willing to take a lot of risk might want to buy some highly risky stocks or mutual funds that hold a long-term possibility of exceptional growth. Maybe the young investor is keenly interested in technology or a particular small company that he thinks has good prospects. These are fine investments as long as one is willing to take the risk and willing to wait a long time.

But as the investor ages, that growth prospect may seem too risky. Even if the investment has done very well over the years, it may make a lot of sense to sell all or part of it and place the money into something more conservative.

Likewise, if an investment has done very well over the years and an investor has much more of it now than she wants or thinks safe, she may want to sell part of it. This method of reducing risk, as hard as it might be with an investment that has been good, can benefit an investor in the long run by helping her keep the gains she has made.

Another time to sell is when an investment is not so good. More precisely, an investor should sell it when he is unable to see that the investment has any prospects for growth. If this is an investment that, if he didn't own it, he would under no circumstances consider buying today, he should sell.

Unfortunately, this usually comes after a great price drop and investors find this investment loss hard to take. But wishing an investment would grow isn't enough.

Investors should also sell if they see the beginnings of trouble at a company. The spectacular flame-outs of our day -- Enron, Tyco and the former Kmart stock -- have had early warning signals. Even though those signals came too late for investors to avoid any loss, those that got out early did better than those that hung on to the bitter end. This is probably the toughest judgment to make, but it's one that can save investors the biggest bucks.

Ideally, selling is something an investor won't have to do often. But all of us probably will have to do it. It's better than the alternative, which is to continue to hold an investment that no longer serves its purpose.

Source: Evansville Courier & Press. Powered by YellowBrix.