The Costco Connection - July/August 2013

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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 MoneySaver.

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?

Personal finance questions?

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 following.

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.

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