Panic Stock Selling
Selling your stocks when you don't have to!
Panic stock selling, that is, selling when I don't really need to is a common problem.
If I have held a share for a number of years and have tracked its performance over this time using internal rate of return (IRR) calculations, and am obtaining an annualized return of 12-15% or better, then there is normally no reason why I should sell it.
Let Your Profits Run
When you are on a winner, why not stick to it and let your profits run? How often do investors sell their best performing investments when they don’t need to? The answer is - more often than you think.
Always keep in mind that unrealized gains on shares in wonderful businesses represent tax-free loans while the shares are held. And you do try to invest in wonderful businesses, don't you?
Of course you can get a bigger ego boost by selling a share that generates a handsome profit than selling a loss-making share that may need to be offloaded to minimize losses. So be aware - or beware - of your ego!
If you don’t need the money, there is usually no need to sell; particularly if you have isolated your share dealings and share accounts from your day-to-day finances as I do.
Selling too early may reduce your chances of enjoying a 'multibagger', a Wall-Street term for a stock that has doubled in price many times. Hence the terms '10-bagger' and '20-bagger'. Peter Lynch, the author of the book One Up on Wall Street developed a passion for this type of stock. Would'nt you?
You may be hit with capital-gains tax after selling a profitable share, particularly if you sell it within a year ... so, think twice before selling.
But Don't Fall in Love
However, there may be situations where a particular profitable share may be over-valued with a price earnings ratio at record levels, and at a level significantly greater than its sector average.
All stocks become overvalued from time to time, especially in bull markets. It is important not to fall in love with a stock that you can sell for a handsome profit and pick up at a much lower price later.
In this situation it may be prudent to sell off a portion of the holding, particularly if the holding represents a greater percentage of the overall portfolio compared to other stocks ... in other words, undertake a re-weighting of the stock.
Having a reason to re-weight a holding in a profitable stock using the price earnings ratio, rather than selling because a stock 'looks high' helps to avoid panic stock selling.
The related articles below examines the importance of the following measures in more detail.
Related ArticlesThe internal rate of return (IRR)
- is a very useful measure for tracking the performance of stocks.
The price earnings ratio (P/E) - is a relative measure of determining the value of a stock.
Portfolio re-balancing by part selling - locks in some profit while continuing the bull-market ride.
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