Some people like to do a spring cleaning on their house. Well I just did a purge on my shares portfolio. I had a lot of deadweight and they had to go even though I was selling at a loss.
It sounds weird but it was a really hard decision because I had become emotionally attached to these companies, which is against our own rule – Never involve emotion when investing.
But I had been invested and following these stocks for years, so it’s only natural.
Some people say you shouldn’t sell at a loss, whereas other people say run your winners and sell your losers. So, which train of thought is correct and when should you sell stocks?
In this video, we’re talking about 5 alternative reasons to sell a stock, which don’t get mentioned that often and we’ll take a look at the stocks I sold and why.
Reminder: invest in UK shares and index funds without attracting any fees by using the Trading 212 app. If you use our link to sign up here, you get a free share for your portfolio. Enjoy!
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There are loads of reasons to sell a stock and you’ll find a tonne of YouTube videos on the subject but they’ll all be telling you the same main reasons:-
1) When a stock is overvalued
2) Looming recession
3) Slowing profits
4) Cut in dividend
5) New major competitor entering the market
6) Directors are selling their stakes
Plus, so many more.
Now these are great and genuine reasons but we’ve compiled a list of alternative reasons.
#1 – Everyone is Talking About the Stock Market
Normally, outside of successful circles nobody talks about the stock market, business or the economy. When nobody is talking that’s an indication that everything is going fine.
But as soon as you start hearing Joey down the pub talking about the stock market and how much he’s making then it might be time to sell.
Joey doesn’t normally invest, Joey has never shown any interest in investing before, but for some reason Joey is now investing. Who’s Joey? He’s just a normal person. In times like this we’re running for the hills as markets are in bubble territory.
Although not a share, a recent example of this is when Bitcoin was reaching almost $20,000 a few years back. People were jumping on the bandwagon – people that had never invested in their life – and then, they lost big time.
#2 – Allocation Too Small – Time Waster
Selling only because a stock has fallen is a bad idea. If the fundamentals of the company have not changed then there is little reason to sell.
However, on occasion the share price will fall below what you consider to be worth your time. If you’ve seen our videos before you might be wondering why we bang on about time so much.
Well time is money or put another way money buys you time. We want money not to buy fancy things but to create time for ourselves.
If a stock consumes more of our time than it creates then it’s time to sell.
Investing in shares properly requires research before a share purchase and for however long you hold that stock. This requires significant time.
If you are buying small monetary amounts and then the value falls further, is it still worth your time to keep up to date with everything? Probably not. Get rid.
#3 – Loss Aversion Bias
You bought a dud and you know you should sell but you’ve lost a few quid and now you feel you can’t sell. You’re hoping that it will recover, so you can then sell once you’ve broken even.
Let’s say you bought a stock for £1,000 and its fallen to £800 because it was a dud. You should cut your losses. Accept you made a mistake and move on.
But nope, you can’t seem to sell. This is Loss Aversion Bias.
It could take years to recover and it may never recover at all. If the stock was then to rise from £800 to £900 this doesn’t justify the decision to hold on to it on its own.
The rest of the market could have increased by a far larger percentage, which means by holding on to the dud you had an opportunity cost. It has cost you even more money. Not cool.
#4 – Rebalancing
There comes a time – maybe once per year or possibly sooner, that a portfolio needs to be rebalanced. Over time some stocks will have grown, and others fallen.
This causes your allocation to drastically change from your original intention, which exposes you to greater risks and possibly lower future returns.
As a result, you should sell some of the successful shares and reallocate the money to the worst performers to rebalance. This may sound counter intuitive but if you don’t you will soon find that all your eggs are in one basket.
#5 – Your Goals Have Changed
Over a lifetime your goals are going to change – it’s inevitable.
For example, it’s often said that young people should be taking more risk and so should probably invest in companies that have high expectation of growth but pay little to no dividend.
But later in life you will almost certainly need an income from the Stocks and so you will require dividend paying stocks.
Those exciting growth stocks may no longer suit your requirements. It’s now time to sell and buy big dependable and often boring dividend payers.
These may no longer have the chance to double in price but those divis are what you need now. No matter your goals make sure your portfolio matches those needs.
What did I Sell and Why?
I took an axe to my portfolio and sold 4 stocks – Centrica , Vodafone, Royal Mail and GVC.
The main reason for selling is that they had all fallen in value since I purchased them. This wasn’t the end of the world as they were all still paying dividends but the amount I now held was not worth my time.
Our lives have changed from the days when we had the time to analyse stocks in detail.
We now spend great swathes of time establishing our business, so there is little point in managing stocks that are worth so little.
It has been a strategy of mine for quite some time that I have slowly been moving away from individual stocks and more towards index funds and ETFs. These get a great return without the hassle.
Also, many of these stocks have had dividend cuts, so are no longer as lucrative as they once were. Each of them even faces horrendous political pressure and increasing competition.
Take GVC, which owns Ladbrokes and Coral. The government is out to minimise the impact that gambling has on society and tax it to the hilt. We see advertising bans on gambling similar to the smoking advert bans in the not too distant future.
Finally – you have to ask yourself – “would I buy this stock today, at the current market price?” If not, why not sell it and buy something else that you would buy. The past is the past – the future is what counts.
I bailed out late, but not too late.
What was the last stock you sold and why? Let us know in the comments section.
Written by Andy
1 Comment
The Fundamental analysis focuses on a specific company and its operations. It analyzes information like financial statements, asset allocation, sales, growth potential and debt structure. This information is vital as it predicts if the company has the potential for growth or not. The technical analysis on the other hand focuses on the historical prices of the stocks of a specific company. You have to compare the information from the technical analysis with other variables so that you can make a decision.
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