Knowing When to Sell

Of course, maybe one or more of your investments isn’t performing
up to your standards. This kind of letdown happens
to the best of us, and you can count on a disappointment
once or twice in your investment life. When underperformance
hits home with one of your investments, take a deep
breath and try to figure out what’s happening.

Figuring out how long to hold on to an investment that isn’t
producing any growth is a challenge. You have to first determine
what is keeping the investment on the rocks. The following
sections offer a look at why an investment may be
underperforming.

When you sell a stock, bond, or mutual fund, make sure that
you find a
suitable replacement and don’t leave the cash lying
in your checking account, where it may be pilfered away by
life’s daily expenses.

Is the economy the reason for your
investment’s slump?

Is the entire market taking its lumps? If so, your then investment
isn’t immune. If one or more sectors of the stock market
are taking a licking, consider the impact to your stock,
bond, or mutual fund. A sluggish economy, or one that is in
retreat, can play havoc with investments. Investments are
long-term endeavors. Don’t sell just because of an economic
downturn. You’ll take a loss.

An economic downturn can create a buying opportunity if
it sends the price of stocks spiraling downward.

Is your stock falling behind?
If a stock is struggling, look at the company. Forget about
what’s happened to date for a moment. If you discovered the
company again today, would you buy it? Do some future
analysis on the company’s prospects. Don’t let your answer
be clouded by negative feelings about the past few months
or years. If you bought the stock because you believed that
the company was well-positioned for a turnaround due to
new and competitive products or services, sales, profits, or
other facets of its financial position, hang on a bit more. The
last thing you want to do is take a loss on a stock that may
turn around a few days or months after you give it the boot.

At the same time, if you decide you wouldn’t buy the stock
again today, or some of the economic reasons that attracted
you to the stock in the first place haven’t panned out, selling
is okay.

Is your bond slipping behind?
If a bond is doing poorly, maybe because the stock market is
booming (typically, when the stock market is doing well,
bonds are lagging, and vice versa), ask yourself what cost you
can expect from hanging on to the bond until maturity.
Compare that expense with what it will cost you to sell the
bond. If interest rates rise substantially, say to 15%, and
you’re hanging on to a
bond paying 4%, you might well be
better off selling the older issue and buying a new bond.

Is your mutual fund fumbling?

If your mutual fund isn’t performing up to snuff, then look
at the fund manager’s style. If the stock market is growth-oriented
and your manager is a value manager who looks for
bargains, you may be wise to hang on. Value-style investing
comes in and out of favor, and you wouldn’t want to miss the
upside. Of course, if an inept mutual fund manager is the
only reason you can find for the lagging performance, you
can sell. Just try to wait until a fund’s performance has been
impaired for at least two years in order to avoid unnecessary
losses.