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 Articles

The 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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