Deciding when and how to sell a share can sometimes be more vexing than deciding what to buy in the first place. In my view the reasons for this dilemma falls into two distinct camps. Firstly if a share has not performed as well as we would like, then selling the investment can be tantamount to an admission of failure. On the other hand, if a share has performed very well then selling it might mean missing out on more gains in the future. But deciding how to take profits or whether to swallow losses can be an important…
In my view the reasons for this dilemma falls into two distinct camps. Firstly if a share has not performed as well as we would like, then selling the investment can be tantamount to an admission of failure. On the other hand, if a share has performed very well then selling it might mean missing out on more gains in the future.
But deciding how to take profits or whether to swallow losses can be an important part of investing. So here are three popular strategies that investors adopt.
Top slicing is a method whereby investors take some profits on shares that have done especially well. The proceeds are then redistributed to underperforming shares within the portfolio. The idea is to continually rebalance the share portfolio to minimise risk – in other words, selling winners and buying losers.
It is favoured by some fund managers who dislike the idea of being too overexposed to any one share. Consequently, regardless of how much they may like a particular share, they feel more comfortable knowing that they have at least locked in some profits from it.
Sell half when shares double
Closely akin to Top Slicing is to sell half your holding in a share after it has doubled in value. The argument here is that you recoup your initial outlay and therefore you, theoretically, have a “free ride” on the remaining shares.
Proponents of this strategy also recommend repeating this process over and over. So if the share doubles again, sell half again and so on.
Selling in thirds
Stock markets can be volatile. So whether you are buying or selling shares, doing so over a period of time may help to smooth out some of the ups and downs of the market. After all, you have no idea whether shares will be higher or lower tomorrow compared to today.
By selling in thirds you roughly divide the shares you want to sell into three equal lots. Essentially, you sell one lot immediately and wait a while before selling the second and third lots.
If the shares rise after you sell one lot, then you could consider selling your second parcel for a higher price because you still have some “skin” in the game. But if the shares fall after you’ve sold your first lot then at least you’ve sold some at a higher price.
Is there a fourth way?
Some of you will be quick to point out that there is an obvious fourth way to sell shares, namely to sell everything at once. The all-or-nothing approach is unquestionably the “cleanest” way to get out of an investment – you either believe it is worth owning…or not.
That said, selling an investment piecemeal over time can be less psychologically damaging should you find that the share you have just sold continues to rise afterwards.
It is worth noting though that selling a share should not be governed solely by how much it has appreciated. Just because a share has doubled in value does not automatically make it twice as expensive.
If a share has appreciated in price, it is possible that the outlook for the company may have improved appreciably. Consequently, the key to whether you should sell should be based on its valuation rather than how much profit you’ve made.
Additionally, what are you going to do with the proceeds of the sale? You may even find that the best place to invest the money is in the shares that you have just sold!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.