Consider a situation where you have to buy a stock at, say, Rs 100. See it climb to Rs 200 and then plunge back to may be Rs 80 in no time.
Then it takes months or may be years for that stock to reach Rs 200. You rue your decision not to sell when the stock had touched Rs 200.
Investor behaviour is motivated by greed. That makes us think that a rising stock will climb further. But until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling.
Yet, the right time to unload shares is one of the toughest calls an investor has to make. Even investment analysts and fund managers admit it can be difficult. Here are a few guidelines you can follow while making the decision:
Targeted return: Whenever you buy a stock maintain a target price at which you will sell the stock partially or fully. When the target price of your stocks has been reached, taking a selling decision is easy.
The targeted return could be 25 per cent or 40 per cent, based on your risk appetite or it could be based on what you think is the fair value for the stock. This discipline of booking profits will stand you in good stead as you will accrue profits, without giving in to greed during a rising trend.
Stop-loss trigger: By having a stop loss trigger you sell a stock, not to book profits, but to minimise your losses. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.
For instance, the stock you have decided to sell is quoting at Rs 100. You have reason to believe that the stock will go up but you need to protect your profits.
Stipulated time or event: It may happen that you are targeting a specific sum for a particular event like a child’s education, marriage or vacation. In case you have an opportunity to realise this sum before the time period is over, you can do so and park it in a safer avenue such as fixed deposits, bonds.
By doing this, you may avoid exposing your investments to the volatility in the stock market closer to your goal.
Asset allocation: Sometimes, because of a relentless rise in a particular stock or stocks, the weight of that stock or stocks in your portfolio could rise substantially, making your portfolio lopsided.
Prudence demands that you reduce exposure to the stock to rebalance your portfolio. The change in asset allocation could also be due to change in preference with growing age.
As you grow older, try to increase the percentage of fixed income instruments in your investment portfolio.
Changes in fundamentals of the stock: There could be fundamental reasons why you should think of selling the stock that you have long owned. It could be a sudden about turn in the company’s financials or prospects — the loss of market share, declining margins, or liquidity problems that peg up the risk of holding the stock. By selling out now, you may get a chance to buy later at a lower price.
Mismanagement: In case you come across any mismanagement in the company or issues of corporate misgovernance then it is better to get rid of the stock at the earliest opportunity.
The above are some of the triggers for selling. There can be a few more which may be relevant to individual investors.
Whether it is a bull phase or a bear market rally, there will always be stocks in your portfolio that merit selling or replacing with other options.
Long term wealth creation requires you to be, not a passive investor, but an investment strategist who aims to maximise gains.
Booking of profits is not a bad idea at all; after all, it leaves you with liquidity, which can be handy when there is an opportunity to buy.