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Thinking of Selling Your Shares Ahead of a Market Crash? Read This First

Last month, we crossed the six year mark of an enduring bull run in Singapore’s share market. And, what a run it has been.

For perspective, you can take a look at the performance of the SPDR STI ETF (SGX: ES3) – a proxy to Singapore’s market barometer the Straits Times Index (SGX: ^STI) – from March 2009 onward. This is shown in the chart below:

2015-04-03 STI Performance

Source: Google Finance

With a run like that, some investors might feel that the time is ripe for a market correction or even a market crash to happen. A handful may even think that it is time to sell off their shares before a market crash hits our shores.

But, selling our investments due to “an expected market crash” may be akin to trying to guess the top of the share market. And, that may not be the best thing to do as investors given the dismal track record that even the best forecasters have of trying to guess the short-term future of the market.

So, what might be the better course of action for a Foolish investor?

Peter Lynch’s Golden Rule on selling

For some help, we can perhaps turn to Peter Lynch. He is someone who might be worth listening to when it comes to investing matters.

After all, Lynch had led the U.S. based Fidelity Magellan Fund to phenomenal annual returns of 29% over 13 years (from 1977 to 1990). In his bestselling investing book Beating the Street, Lynch offered his thoughts on when shares should be sold:

“There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.”

For Lynch, a good reason to sell would be almost always due to weakening fundamentals in a company, and not because of dire predictions about the economy or the movement of the stock market.

We can see the wisdom in Lynch’s reasoning with the experience of vehicle and test inspection outfit Vicom Limited (SGX: V01). Since 2004, the company has delivered increasing earnings per share, free cash flow, and dividends to boot. The summary of its performance can be seen below:

Vicom' historical earnings, free cash flow, and dividends

Source: S&P Capital IQ

The strong fundamental performance of Vicom’s business has not gone unnoticed by the market. As you can see in the graph below, Vicom’s shares have steadily climbed to new heights over the years since the start of 2004.

2015-04-03 VICOM Chart

Source: Google Finance

Foolish summary

The astute Foolish investor may conclude that selling Vicom’s shares at any point over the past 10 years due to an “expected market crash” (this includes even the 2008-09 financial crisis years) would have generally turned out to be a terrible idea.

If a share has improving fundamentals, selling out due to reasons like an expected market decline may well work against your long term investing goals.

None of all the above is meant to say that you should never sell a share. But if you ever choose to sell, Lynch would prefer it to be due to deterioration in its underlying business – and not because of fears that the sky is falling.

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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 contributor Chin Hui Leong owns shares in Vicom.