5 Simple Reasons to Sell an Investment

In my last posting “The Easiest Way to Lose Money in the Market – Selling” I discussed how the average investor unfortunately sells when stock prices are dropping and panic sets in.

There are however some simple rules that you can use to determine when is a good time to sell an investment, including stocks, bonds, funds or ETF’s. These rules aren’t for day traders; they are for long term investors.

  1. Rebalancing. Investors need a plan that includes diversification. The larger the portfolio the more diversification makes sense. Let’s say that you determine Healthcare should be 10% of your portfolio. At the end of a quarter you review your holdings and see that your Healthcare has gone up so much that it is now 15%. This is just too high and you decided to sell some of your holdings in this sector and “rebalance”.
  2. The Story Changes. You always need a specific reason to buy or sell a stock. I started buying Airline stocks in early 2014 when I saw that oil prices were dropping and each of my airline stocks had a unique story. American Airlines was bought by US Airways, Delta bought a refinery in Philadelphia, JetBlue announced a restructuring. At the same time I started selling my Utilities in late 2014 to lock in my gains as it became clear that the Federal Reserve would start raising rates in 2015 and Utilities would not be a good place to be for the next 12 months.
  3. Look at the Technical’s. Technical’s refer to stock charts. It is really important that you know how to read and understand stock charts. If you are a long term investor you might want to look at the 12 month “daily” chart. On this chart you can plot the following comparisons:
    1. 50 day EMA (exponential moving average), this is 2 trading months
    2. 200 day EMA, this is roughly 10 trading months
    3. SPY, the industry standard ETF normally referred to as “the market”

Death Cross

Here is an example of a strong selling indicator, a “death cross”. One of my past holdings was AEP, American Electric Power, one of the largest and best run utilities in the country. In the last few days AEP’s stock price ( had a “death cross”, a clear broken trend. The 50 day EMA (black Line) crossed below the 200 EMA (green line). In addition, AEP (blue line) was already trending below the overall market SPY (purple line). Sell, sell, sell! 

4. Play with House Money. When you make a lot of money in a speculative stock, sell some on an “up day” to take some profits. This is especially true in a tax sheltered account like an IRA or 401K plan. Jim Crammer always preaches this.

5. Moves by the Federal Reserve. Never fight the Federal Reserve, as the saying goes, it will bite you in the backside. The upcoming rate hike by the Fed has been telegraphed now for almost a year. This means that most interest rate sensitive stocks or bonds will get hammered. Sell your bonds now, they are already dropping in price and you will lose much more in principal that the very small dividends they pay.

 

 

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