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What Are You Waiting For?
July 31, 2011
Bradley R. Newman, CFP®

The ability to continuously evaluate your investment holdings and execute sales when each position reaches the point that it is no longer appropriate for you is referred to as a "sell discipline". Unfortunately, this key ingredient to successful portfolio management is something that most individuals, and many professionals, lack.

Given the volatility of the past three years combined with a healthy sense of uncertainty about both the economy and the stock market, it is easy to see how you could become hesitant to execute the decision to sell a particular investment. However, that indecision could be crippling the performance of your portfolio. For example, our firm's decision to sell significant stock holdings in September and October 2008, once the losses of the financial meltdown had already begun to occur in virtually every portfolio, was a difficult, but appropriate decision; however, we have seen the cautionary tales of many people who made no changes during that time.

When Will It Be Enough?
How much money do you have to make before you'll sell an investment? When an investment is not longer an appropriate holding, but has increased in value dramatically, you may be reluctant to sell a winner.

While there is always the risk of selling a portfolio holding and watching its value continue to climb, it is often best to protect your gains and sell while you are ahead. If you can't bring yourself to sell the entire position, consider selling a portion of the position by rebalancing the holding down to your original purchase amount.

The decision to sell technology stocks as the "tech bubble" was bursting was difficult for many people based on their optimism that the downward trend would reverse itself; it did not and the NASDAQ still sits at roughly a 45% loss from its March of 2000 apex. We still see new clients come to us holding common names from the "tech bubble" (Lucent, Oracle, Nokia, etc) that were purchased at opportune times, provided appreciation of 200% - 300% or more, but are now held at losses of 20% - 30% or more; the real question is "at what point on the way down should those positions have been sold?" - 150% gains, 100% gains, 50%gains or 25% gains?

It May Never Come Back
The flip side is the inability to realize a loss on an investment that is no longer suitable and move on to a more appropriate investment.

Numerous academic studies have shown that, psychologically, it's difficult for most investors to sell an investment at a loss. Many will attempt to wait until the investment gets back to break-even; however, that may never happen or it may take a significant amount of time to rebound - please note the NASDAQ data referenced previously. The best approach is to forget about the past and ask yourself "Would I purchase this holding today?" - if the answer is "No", then it is time to sell.

What Is Your Goal?
When you purchase any investment, you should have an end-point in mind for that position, both in terms of gains and losses. By setting price targets in advance, you will establish clear benchmarks for each holding.

The common denominator of not selling, either winners or losers, is that emotion enters into the equation; fear of missing future gains, fear of not recouping losses, fear of incurring taxation, etc. One way to take the emotion out of the sell-decision is to set targets on both the upside and the downside. While there may be unique or extraneous factors that cause you to retain the position at those target points, a thorough review of the holding should occur and a detailed rational should be made as to why the position is not sold.

Make The Hard Decisions
The hard decisions in investment management are not the decisions to buy; rather, they are the decisions to sell. The decision to buy can generally be supported by a notable amount of data that supports your original hypothesis. However, regardless of the data supporting a decision to sell, the fear of missing out on future upside or the distaste for taking a loss will often be the factors that will prohibit you from making the right, albeit difficult, decision.

Bradley R. Newman, CFP from Roof Advisory Group, Inc., an independent investment management and financial advisory firm based in Harrisburg. The firm is a fee-only Registered Investment Advisor that provides portfolio management and financial planning services for individual and institutional clientele. The firm's email address is

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