Selling a share? Read this first

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

When it comes to the actions we take in our portfolios, we tend to put the lion’s share of the brain power on getting ready to hit the buy button. It makes sense, we need to get to know a company, value its shares, determine a buy price that is right for us and overcome the psychological hurdles that come with putting our money to work in the markets.

In theory, selling should be easier - after all, the share price performance is there for us to see so that’s one unknown factor off the table. So, why does it end up feeling just as tough?

Leaving the party while the music’s still playing tends to come with a pang of FOMO. What if a good night turned iconic just as you got into the Uber? What if it flipped from lame duck to rager? You’re already regretting your decision as you walk out the door, awakening the ‘regremlins’. (I’m not sure that’ll catch on but I’m sticking with it.)

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Behind all of this sell-button anxiety is the question, “Am I doing the right thing?” and that’s a tough one to answer purely on share price performance grounds, given none of us knows what will happen to it next. Psychologically it’s important to us, though - we don’t want to leave money on the table and there’s a strong urge to be ‘right’. But, when the ego starts to muscle in like this it can really make the whole exercise a lot more difficult. It’s why we anchor to certain prices and often why we sell winners too quickly, while hanging onto losers for far too long - something known as the disposition effect.

The result of all of this is that relying on our instincts and logic tends to be a flawed strategy when it comes to selling shares. The good news is we don’t have to.

Once we stop thinking about being right in terms of getting the best possible price, and start equating ‘right’ with doing the best thing for our long-term portfolios, it all begins to click into place. That starts with replacing our ego with a clear set of instructions to follow ahead of time. Nobel Prize winner, Daniel Kahneman, made it pretty clear that we are horrible when it comes to making decisions under pressure, so try not to. Planning for the situation that would make you sell a share is not only a good way to create a repeatable, long-term investment strategy - it also saves you from yourself when the urge to act against your best interest crops up.

Selling to match life goals

First, think about your needs. Do you need to sell a stock to fund a house deposit or other big expenditure? A clear goal takes away the umming and ahhing but it does require foresight and a period of planning beforehand. Selling at the last minute risks exposing your money to volatility right when you need it most.

Have your aims changed? It might be time to sell so you can rejig your portfolio. Swapping growth for income? You’ll need to make sure your asset mix is pointed towards your new goal. These big questions are best asked well before you need to sell anything, and should help give context when it does come time to shift into cash.

Setting portfolio-level sell criteria

Once the big picture has direction, you can add sell criteria into your process at the portfolio level. These should reflect your investment strategy no matter what stock you hold, as well as your risk tolerance, ability to deal with volatility and time horizon. One way to factor this into your thinking might be to set a few baseline rules - here are some questions to consider:

• Are any of my stocks becoming too large a part of my portfolio? Would selling a part of my holding help diversification?
• Do I need to rebalance to make sure my assets still fit my risk tolerance?
• Has the stock fallen to a level that triggers a review? (Some investors set performance levels to ensure they never hang onto laggards i.e. -10% from the buy price may require a rethink of the thesis, and possible sale.)
• What valuation levels am I happy with in various sectors, within my portfolio? Have any of my stocks breached these?

It’s not an exhaustive list but the idea is to add in some central tenets that you will keep coming back to, regardless of what you actually hold in your portfolio.

Adding in stock-level sell criteria

When it comes to evaluating individual holdings, you might want to set some key questions to make sure you’re sticking to the long-term plan and not being swayed by short-termism. A few starter questions might be:

• Does the reason I bought this stock in the first place still ring true?
• Have there been any big changes in the company’s business model, its management team or the product/service? If so, am I still a fan?
• Would I buy this stock if today was the first time I came across it?
• Are the business fundamentals reflected in the share price or is the market overexcited/not excited enough?
• Has the stock reached what I consider to be fair value?

Notice that it’s only the last couple that bring in the share price. That’s where a lot of us start (and stay) but really we should be concentrating on the businesses underneath the price charts. Ultimately, we’re trying to limit the chance of fear or greed steering the wheel, which often happens when the graphs get jumpy.

If you find yourself thinking:

• “I’ll just wait until I break even, then I’ll sell”, that’s probably loss aversion kicking in.
• “It’s in the green, I better sell” that sounds like the disposition effect.
• “I keep seeing people selling, I should too”, your herd behaviour is showing.

Pause, go back to your portfolio and stock-level sell criteria and base your next thought on your own strategy, not the heat of the moment.

So far we’ve focused on making sure we’re doing the right thing by our own goals and strategies by selling. If we’ve ticked the boxes there’s still the matter of how to sell.

If you think a share may continue to rise, it might be useful to sell in chunks at regular intervals. Staircasing out of the stock lets you leave in stages and take part in any subsequent market movements. There’s no guarantee you’ll be able to sell into a consistent rise but it can be useful if you are concerned you’ll exit too early.

Limit orders might also be able to help make the selling process slightly less stressful. Setting predefined price levels that will trigger a sale lets you step back and get on with your day. If that level is hit, the order will go out to the market and will hopefully be filled in the background. Again, it takes you away from the coalface and reduces the chance of you acting outside your own guardrails.

Even if you aren’t a value investor, trying to find unloved and overlooked stocks, have a look at how they sell. It’s often systematic, reasoned, strict and there’s normally already a thought given to how that cash will be recycled into the next opportunity. When a trade goes against a good value investor, they will sell at a minimal loss to avoid it turning into a big one, and go again. Whether this is your style or not, there’s a lot to be said for sticking to an efficient, repeatable process.

It’s normally the market that prompts our idea to sell, whether a stock is driving higher or diving lower. If that’s the case, the best thing we can do is stop, zoom out and factor in the hierarchy above, namely our life goals at the top, our portfolio rules just below and our stock-selling criteria to boot.

Using this process helps us position our desire to sell in the context of our lives, the market and the stock itself to give a rounded view of the end decision. It may mean you reel back from selling and focus on the long-term story or it may give you added confidence to act. Either way, you’ve informed yourself with a repeatable and efficient process, not vibes.

If you do sell and want to avoid the party FOMO, remind yourself that you are acting on the information you have at the time. It’s why it’s so important for this information to be accurate and meaningful enough to act upon - otherwise the regremlins are likely to emerge.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.