September 1, 2004
always the best thing to do. “After wars, recessions, political strife, or external shocks to the market, we typically see that people who hang in there [and don’t sell] are usually rewarded within an 18 month period or so,” she says.
Jenkins says investors should consider more than just price when developing a sell strategy. Other situations he takes into account when managing Basden’s investments are: if a company restates its earnings, if the fundamentals at a company change significantly, or if a stock becomes overweighted in the portfolio. When a company restates earnings downward or when its fundamentals change significantly, it’s sending a signal that it may not be as profitable as was once thought. Investors may want to take the profit they already have or reevaluate the stock price at which they might consider selling.
For Dorsey, the biggest reasons to sell include when fundamentals change, competition is heating up, growth is slowing down, or the market has become saturated.
When a portfolio contains a high volume of one stock or industry sector, that is a sign of overweighting, which sends the signal that the portfolio needs a more diversified mix of investments. “If a stock doubles in value and becomes 20% of a portfolio, I may scale it back to 10% and make it in line with proper asset allocation,” says Jenkins. “This is so that one asset doesn’t become too big and determine most of one’s net worth.”
TAKE THE MONEY AND RUN
Properly executed, a sell strategy can be an important part of your financial plan, particularly in times of crisis. If life throws you a curve and you need to sell stocks quickly to raise funds, the sell strategy you execute should be designed to limit the damage to your overall financial goals.
Since stocks are a liquid asset, cashing out for an emergency or for a planned expense can be handled fairly easily. Basden’s emergency came when she was determined to give her daughter the 300-guest wedding of her dreams after she graduated law school. Unfortunately, Basden’s husband became ill, which caused a decrease in the household earnings. Undaunted, Basden turned to Jenkins to come up with a plan to make sure the show would go on. “We looked at every item in the overall portfolio and sold proportionally across the account, selling 10 different positions in varying degrees,” explains Jenkins. He also cashed out some stock dividends during that period instead of reinvesting them as he normally would have. That strategy seems to have worked for Basden. The wedding was two years ago, and Basden still has a healthy 35% equity, 65% fixed-income portfolio.
A sell strategy should also have a lot to do with how soon you plan to use the money that you have invested. “If you want to start your own business in five years or need the money for your child’s education in six years, you may want to set up stop-losses,” advises Khalfani. Setting up a “stop-loss” order when you purchase a particular