The North American markets are up more than 50 per cent since their March lows. Individuals that have been investing in the markets over the last six months have enjoyed significant gains in their equity portfolios. However, with this rapid growth comes a new positive dilemma, but a difficult one to assess – when do you sell?
At some point, an investor will come to the realization that it is better to sell an investment at a profit than to be greedy and risk losing what they have made. Some wait too long and sacrifice most, if not all, of their gains. Others time it perfectly and sell at the top. How do you know when to sell and how much do you sell? These questions are just as difficult as knowing when to buy.
Most people have some sort of target in mind as to when to sell off all or some of their shares. Some investors use the strategy of selling half and keeping half invested, while others sell their winnings only. Some investors just end up selling off the whole investment and look for other investments that may be better valued. Any of these strategies can make sense, however some analysis should be done on the investment before finally pulling the trigger. For example, the following questions should be asked. What kind of an investment is it that you are selling? Does it pay dividends? Is the investment in a hot sector of the market that current has significant momentum? How is the company you’ve invested in doing? Where is the stock trading in relation to its highest and lowest points over the last five or so years? What is the company saying about its potential to increase profits?
One of the most compelling reasons not to sell a stock in full to take profit is if the shares you own pay a good dividend. For example, in the spring of this year, the Canadian banking sector was trading at such cheap levels that most of the major banks, including Royal Bank, were paying above six per cent dividends on their common stock. Putting this into perspective today, interest-bearing investments like GICs pay between one and two per cent for a one-year term. Thus, Royal Bank shares were paying a fantastic rate, and dividends are better for taxes than income from interest. Since the spring, common shares have doubled in price, but this is an investment I would not take full profits from. I believe that the share price will continue to rise as the Canadian economy gets stronger and investors are getting paid a tremendous dividend to wait for that growth. As well, when the Canadian economy gets back on its feet, there is a good chance that a company like the Royal Bank may even increase its dividend.
For stocks that do not pay dividends, an investor may want to set a target price for the shares and sell all or at least the original investment amount — if they think the shares can go higher — once the target price is reached, but keep in mind that you are not getting paid to wait for the stock to rise further. Depending on your analysis of the company, you can decide to sell all or leave some behind for future growth possibilities.
An important rule in investing is to never fall in love with an investment. Once your target is reached, it is time to make a decision whether to sell all or a portion of it, unless it pays a dividend. Don’t fall into the trap of thinking a company can go up forever. This is a classic investor mistake.
One type of investment that as an advisor I do not set targets for are mutual funds. Mutual funds are long term investments that should be held for many years because the fund manager does all the buying and selling for you. When you buy a mutual fund, you buy the abilities of the manager, so if he is making the right moves, knowing when to sell and hold, the investor does not have to do anything but own the mutual fund over time. The track record of the manager is the most important reason to own a particular fund.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at email@example.com. I will be glad to speak with you.
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.