Your Finances with Stephen Maltby
Investors are continuously inundated with investment advice about what to buy. Everyone seems to have a good stock tip or fund recommendation. Rarely though, does anybody talk about the often more difficult decision of when it makes sense to sell an investment. If When good quality stocks are making gains in the market, the general rule of thumb is "let profits run". Stay with your investments until research targets have been met, and not revised upward. Or, if there is a downturn reflecting a significant change in investor sentiment, then consider shifting out if the research outlook has been revised.
When your investment performs poorly, the decision on when to sell gets even trickier. Human nature gets in the way and we either don't want to admit we made a mistake buying the stock in the first place, or we hope the stock will come back in the near term. Unfortunately, time and time again, poorly performing investments can usually be tied to deteriorating fundamentals and therefore, a loss will just get worse over time. Rarely do these deteriorating situations turnaround. As a consequence, we end up holding on to poorly performing stocks much too long, watching them sink ever lower.
Averaging down does work but we must also avoid the 'catching the falling knife ' investment of a company that is ultimately going to fail.
An effective way to prevent hanging on to these persisting losers is to set up a "stop loss" point. This is a predetermined price, which triggers the sale of the investment. This strategy also works well with your winners. Let's consider an investment that has performed beyond your expectations. Even though you still feel there is further potential upside, you are now considering locking-in your gains. By realizing a capital gain, you not only create a tax liability in the current year, you may also miss out on any further price appreciation. If we use the "let profits run" strategy, we will simply reset the "stop loss" point to an appropriately higher value and continue to hold this good quality investment.
"Stop Losses" can be dangerous. You can stop yourself out of the market due to heavy volatility as well so ensure you understand what limits you are considering.
Many of us have managed assets and private investment managers so the stop losses are not applicable here.If you have a loser in a fund or wish to realize a capital gain ,investigate if a fund group has alternative managers inside the group who you feel comfortable investing with.A simple switch within the fund group will accomplish your realization of the loss and proper reinvestment as you planned.Avoid selling a fund if at all possible that incur Deferred sale or low load sales charges.Although the long term deferred sales charges(5 to 7 years ) have gone the way of the Dodo Bird for most reputable firms ensure you are aware of the alternatives between no-load,low sales charge and deferred charge options.
And remember, in all cases do not make an investment unless there is a well-researched reason for doing so and you have consulted with your Investment Advisor. Having this fundamental base to work from makes the decision of when to sell, or when to hold, much easier.
Stephen Maltby is an Investment Adviser and Chartered Accountant with CIBC Wood Gundy. He has been in the financial services industry for more then 30 years and has held various accounting, investment and management positions with several accounting and investment firms over the years.He is in addition to his Advisor role a First Vice-President and Executive Director Atlantic Canada, CIBC Wood Gundy.