Canadian MoneySaver magazine has provided Canadians with balanced insight into personal-finance issues since 1981. Through an exclusive arrangement
with The Costco Connection, Canadian MoneySaver’s experts provide Costco members with answers to their questions about financial issues.
Stocks: When to hold … and when to fold
Missed quarterly earnings. In my view, if you have a five- to 10-year investment hori- zon and you sell because a company missed its 90-day earnings, you may need to examine whether you are, in fact, a trader rather than an investor. Insider selling. While I never like it when company executives sell their own stock, sometimes executives sell so they can pay taxes, buy houses and so on. Rarely does it mean individual investors in the stock should also sell. One caveat, though: If a senior executive sells all of his or her stock, it is generally a pretty good warning sign that something is not right at the company. Because it is up. Just because a stock is up doesn’t mean you should sell. Find out why it is up: accelerating earnings maybe, or better cost control. While it is true you will never grow broke taking a profit, you will pay taxes and may miss out on a true long-term
winner. C © LIGHTSPRING / SHUTTERSTOCK
By Peter Hodson
ONE OF THE HARDEST things for individual investors is to know when to sell a
stock. Many times, you might sell simply
because a stock has gone up and you’ve made
some money. More often than not, though,
this is not a great reason to sell. You will never
have a giant winner if you sell too early.
Watch the yield on your investments.
If you can find higher dividends elsewhere,
you might improve your income by switching
into something else. Keep in mind, though,
that you will likely pay 23 per cent capital
gains tax, so if you are switching just for yield,
your new investment needs to yield that
much more than your old investment or you
won’t be any better off, after taxes.
Peter Hodson, CFA, is editor of Canadian
So, if you are an individual sitting on a
nice gain on a “normal” type of company (i.e.,
not a high-growth small cap or a resource
exploration play), what should you do? How
do you know when to sell?
Here are some things to consider.
Compare the company’s returns with
the market’s returns. In the post-2008
recovery, for example, even stable blue chips
doubled. If you had an absolute return target
in mind, you might have sold at that target
and missed out on much bigger gains in the
full market recovery. Always consider your
gains in the context of what else is happening.
Watch for dramatic changes at the
companies you own. Rapid management
turnover, increased debt loads, a change in
business direction (e.g., buying a brand-new
business unrelated to the current business) or
adding tons of debt may be reasons to sell.
Basically, you want companies to be slow and
steady growers—boring, yes, but boring is
often best when it comes to investments.
If those are a few reasons for selling, what
reasons might you safely ignore? I suggest the
Watch the weighting of the company
in your portfolio. Often, the best reason to
sell is for diversification purposes. If you have
more than 20 per cent of your assets in any
one company, you are really betting on that
company, because your portfolio’s results will
be tightly tied to its performance. That is not
investing—it’s gambling. Selling for diversification purposes also helps take the emotion
out of your decision.
Analyst downgrades. These happen too
often, and, unfortunately, analysts don’t have
a highly accurate track record.
More in archives
Email to: questions@canadianmoney
saver.ca. Or send to: Canadian
MoneySaver, The Costco Connection Q&A, 55 King St. W., Suite 700,
Kitchener, ON N2G 4W1.
Selected questions are answered
in this column. Costco members
are offered a one-year (nine-issue)
introductory online or print subscription for $19.95 plus tax. Order at
click on “Subscribe,” or by calling
519-772-7632. Online, use “CC” for
the discount code at the bottom of
the page. You can view a recent edition and sample articles online at
On Costco.ca, enter “Connection”;
at Online Edition, search
The opinions of the experts may not
apply to Quebec residents.