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When to Sell

ASX research shows that most people find it much harder to decide when to sell rather than when to buy. The bottom line is that there is never a right time or a wrong time to sell, it all depends on your investment approach and your view of the current market conditions.

 

In this article Chris Tynan, Financial Adviser with Wilson HTM Investment Group, looks at some factors to keep in mind when deciding on whether or not to sell.

Investment decisions are different for each investor; some will be looking for capital growth, some for yield, and some a bit of both. Some will want to hold stocks for tax minimisation and some won’t.

The basic starting point is that investors need to be flexible and ready for change, and need to know what to expect before they make an investment.

To help with the sell decision investors need to ask themselves some questions.

  • What sort of risk profile do they have?
  • What do they expect from their investment from the start?

They need to consider the wider investment landscape and how this will affect their
investments.

There are two distinct types of investors; the aggressive investor, or trader, and the portfolio investor. The ease with which you are able to make sell decisions will depend on which category you fall into.

The Aggressive Investor – The Trader
This sort of investor normally has a higher risk/reward profile. They are happy to take a quick profit and move on to the next investment.

These investors will normally have a target gain and target loss, say 10 per cent, on each investment before they realise the loss or gain by selling the shares, and then move onto the next investment.

The sell decision for this type of investor is not a hard one. If the investment underperforms they are quick to move onto their next investment target.

Capital gains tax issues would not play an important role in their decisions as they normally have a shorter-term view. A changing investment landscape, hot sectors, and disappointing company results are all triggers for this sort of investor to sell or buy.

The Portfolio Investor
The portfolio investor is the more likely profile to have problems with the decision to sell. A far more conservative investor with a much lower risk /reward profile than the trader, this investor will have a longer-term view, and will take into consideration the dividend and capital growth prospects of each investment.

They will tend to hold an investment for twelve months for tax minimisation purposes, and have a strong relationship with an adviser, who is instrumental to any decisions to make changes in the portfolio.

This investor is slower to react to hot sectors or hot stocks, and will take a more balanced view on their investment.

When making the decision to sell or buy, investors need to take into consideration what is happening at three levels; the economy, the sector and within the company itself.

Economic environment
At the highest level, investors need to take into consideration factors affecting the economy.  Following are some of the questions that you will need to have answers for:

The rising Australian dollar 

  • What impact does this have on companies with large export earnings?
  • How does it affect their earnings for the next few years?

Rising interest rates

  • Does this force companies looking to expand to sit on the sideline waiting for the right time?

Slowing of world growth

  • This will affect demand for commodity-based stocks such as resource stocks.

Sector performance
At the next level, investors need to assess how the sector they have invested in is performing, for example:

  • Has it changed since they invested?
  • Is demand still high and what is the outlook?
  • Will it run out of steam like the technology boom did in March 2000, or is there a more steady form of growth?
  • Is supply outstripping demand and are there now too many competitors?

Individual Company performance
At the company level, investors need to be aware of any fundamental changes that have occurred in the company since they purchased the stock, for example:

  • Has there been a change in management that could prove to be unpopular?
  • Is competition increasing, resulting in a drop/fall in sales?
  • Is the company repeatedly issuing profit warnings?
  • Has the company reached the valuation that the investor was looking for and therefore is the investor happy to sell the stock?
  • Has the company gone from a growth stock to a mature business and therefore is it no longer suitable for the investor’s portfolio?

Most investors seek some form of guidance and input when making decisions. The relationship with an adviser gives them a second opinion and also provides experience, research ideas, and reassurance in their decision making. Through this relationship they continually have a person to bounce ideas off and receive updates on their investments and portfolio reviews.

Article written by Chris Tynan, Financial Adviser with Wilson HTM Investment Group, he can be contacted via the Wilson HTM website: http://www.wilsonhtm.com.au/

© All rights reserved 2005. This article has been prepared by Wilson HTM and licensed to ASX. The views are those of the author and not necessarily of ASX. This material is educational and it is not intended to constitute financial advice. It has been prepared without taking account of any person's objectives, financial situation or needs and because of that, any person should, before making an investment decision, consider the appropriateness of the advice having regard to their objectives, financial situation and needs.

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