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3 Terrible Reasons to Sell Your Shares

Credit: Terrance Heath

Last month, I wrote an article on three reasons for you to sell your shares. They include changing company fundamentals, correcting an investment mistake and unwarranted price surges.

These are legitimate reasons for investors to seriously consider removing a particular stock from their portfolio.

However, there are also numerous times when investors decide to sell their shares because of the wrong reasons. This can result in loss of potential profit in the process.

My friend recently told me a story of an investor who had a bought a particular tech company 20 years ago. At that time, the share price was just $0.67, after adjusting for share splits. About a year after he had bought, the share price doubled.

The investor immediately sold his position, thinking that he had made a nice profit on his investment. Little did he know that if he had simply held on to his investment, it would have grown multiple folds since then.

Today the stock is worth $160. With dividends reinvested, said investor would have made a mind-boggling 26,300% returns on his investment instead of just 100%.

With that, here are three terrible reasons to sell your shares.

Terrible Reason 1: Due to increase in share price

The story of the investor who sold his shares because of a 100% gain in the share price is the perfect example of selling resulting in a missed opportunity. Investors tend to want to lock in profit on their investment after a strong price surge. However, this investment “strategy” can prevent you from profiting even more.

Legendary investor, Peter Lynch, always looked out for companies that had the potential to be a ten-bagger (companies that can appreciate 10-fold). If we base our investment decisions on taking a profit simply because the company has increased by 100%, we will never be able to reap the potential returns of wonderful investments.

Instead of simply selling investments that have appreciated, we should relook at what had caused the price surge and see if it is warranted. If so, we should be happy to continue holding on to the investment.

Terrible Reason 2: Because you read in the news that a bear market is coming

Almost every day in the news, you will find headlines that go something like, “Market expert predicts downturn this year”.

This is obviously very worrying for investors who are involved in the stock market. But if you look back through the years, there will, in fact, always be “market experts” or “gurus” who are predicting doom-and-gloom.

Bear markets are bound to happen because of investors’ insecurities or short-term government policies. However, if we always get cold feet because of a prediction that most of the time is inaccurate, we will not be able to benefit much from the overall upward nature of the stock market.

Terrible reason 3: Because of speculative world news

There is constant bad news occurring around the world. Terrorist attacks, Middle East crisis, North Korea nuclear threat, and shootings in the United States just to name a few. All of which can have an impact on short-term share prices but are unlikely to have any long-lasting impact on businesses in general. Investors should not be overly concerned with world news that has little impact on their current investments.

A terrible mistake would be to sell your stocks because you think a particular world news will affect share prices in the near-term. Price volatility in the market is almost impossible to predict and selling because of world news can lead to potential loss of profit down the road.

The Foolish bottom line

Many investors move in and out of the market way too often, basing their decisions on factors that have absolutely no long-term impact on a company’s fundamentals. If we are to be successful investors, we need to ignore the noise surrounding our investments so that we can make rational long-term investment decisions.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.