Selling Your Stocks

Selling because of limited performance!


You don't normally plan for limited performance when selling your stocks. But sometimes you need to!

I purchase with the intention of holding the stock for at least five years, and with the goal of make an annualized internal rate of return (IRR) of 12-15% or greater on my investment.

If I continue to make or exceed 15%, I will hold it ... forever. However, if I judge that there is a bubble about to burst, then I will start part selling since most stocks become overvalued from time to time.

The reality, however, is somewhat different as the stock market is a fluid beast and half the current stocks will not be around in 20 years time for one reason or another ... and it is not necessarily because that many companies will fail.

The most common reason relates to company takeovers and companies hiving off divisions that they do not want for one reason or another.

The best laid investment plans can go astray, since with stocks, as well as with other investments, 'stuff happens'.

In fact 'stuff happens' fairly often, some of which can be very rewarding for the stock holder and some not so rewarding.

This can include nice things like special dividends and exceptional performance on the one hand, and serious under performance on the other.


Selling Scenarios

If after two years my investment has not returned a 5% internal rate of return (IRR), I sell. I consider that I am better off parking the proceeds in my investment account.

There I can make a similar or better return, but with less risk, while looking for a more rewarding share investment.

Taking this scenario somewhat further, if my investment has exceeded the 5% IRR hurdle after two years but has not managed to exceed 10% after three years, I also sell.

The reason for this policy is that I consider that three years is sufficient time for the stock to have overcome any hiccup that might have under-valued the stock at the time of purchase.

There may be cases where the fundamentals remain positive after three years and it might be worthwhile to hang on to allow the market to recognize the value of the stock. This particularly applies where there has been a severe overall downturn.

But the stock is likely to be an ongoing drag on the overall portfolio performance requirement of at least 12-15% if I hang on to it for too long.


To Conclude

These policies of course require an accurate measure of performance.

As indicated above, an internal rate of return calculation (IRR) does this for me.

I try to be realistic with my stock purchases and accept that some (hopefully relatively few) stock investments are going to deliver limited performance compared to others.

Do you have a plan, like me, to do something about it when selling your stocks is the best move to make?

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