Selling Your Investment: Five Mistakes to Avoid

When the security you bought has increased in value, you can make a profit over it, provided you sell the security. How much profits you reaped-in depends not on the current price of the security, but at what price did you sell the security. Unfortunately, many investors sell based on emotional factors, making one of several mistakes.

I have listed five mistakes most investors make when it comes to selling. Along with that i will also discuss how to avoid those mistakes.

1. Holding on to an investment with a loss
Say you bought stocks worth $10,000, at $100/share. Few days after buying them, the stock price dropped to $90/share. You decide to hold on to the investment till the investment atleast gets back to a break-even level of $100/share.

Problem: It is generally difficult for investors to sell off their investment with a loss. They would rather prefer to wait until they see some positive numbers. However, that may never happen or may take a long time to do so.
Solution: You should re-evaluate your investment. Instead of holding the investment for a long term which might not turn out to be profitable, you should consider selling the investment, if you can reinvest in something which has a better prospect.

2. Hanging on to capture more gain
Say you bought stocks worth $10,000, at $100/share. After buying them, the stock price went up to $120/share in a short while. You decide to hold on to the investment in the hope of making even more.

Problem: When an investment has increased dramatically, you may be reluctant to sell it, even if you feel its price has gone too high too fast. There is a strong possibility that the prices might fall from there, reducing your profits.
Solution: By putting a stop limit on your investments, you can bale out if the prices fall. However there is always the risk that you will sell and the price will keep going up.

3. Not setting price targets
Say you bought stocks worth $10,000, at $100/share. In couple of days it shot up to $125/share. You decide to hold on to the investment in the hope of making even more. In next couple of days it drops down to $90/share. You again decide to hold on to the investment in the hope of recovering your loss.

Problem: When an investment has increased/decreased dramatically, you are reluctant to sell it, in return for high gains or to break-even. In short, you do not have an exit strategy.
Solution: Always set high and low price targets for re-evaluating an investment. You don’t have to sell when the investment reaches those targets, but at least review it. Sticking with rigid rules for selling when an investment declines by a certain percentage can help prevent substantial losses.

4. Worrying too much about taxes
If you hold your stocks for more than a year and then sell it, you pay long-term capital gains which is 15%, or else you pay short-term capital gains which is 33%.

Problem: Taxes can consume a significant portion of your investment gains, especially when it is short-term. To avoid paying higher taxes you hold on to your investment even though it is profitable.
Solution: Avoiding taxes may not be a good reason to hold on to an investment. There are typically strategies that can be used to offset the tax burden, but there’s not much you can do about a loss in investment value. If it’s time to sell an investment, you should probably do so.

5. Not paying attention to your investments
Say you bought stocks worth $10,000, at $100/share. After that you do not evaluate your investments periodically.

Problem: Alot of investors do not look after their investments. They term themselves as long-term investors and forget about it. They do not spend time periodically to evaluate their investments.
Solution: Your portfolio needs to be evaluated on a periodic basis or you could miss signals that it may be time to sell. You should reevaluate an investment when the company changes management, when the company is acquired by or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock.

Conclusion: Selling at the right time is an art, which is not easy to perfect. However make sure you would some of the common mistakes to reap in more gains. Do not hang on to capture more gains or hold your investment with a loss, when there is a better opportunity waiting for you. Also set price targets, stop worrying about taxes and pay attention to your investments. I assure you, if you stay away from these mistakes you would definitely increase your profit levels.

(Source: Investorguide)

  • Like a lot of folks, I bought a bunch of stock that took a nose dive when the stock bubble popped. They were fundamentally good companies so I held the stock and then took a relatively aggressive stance and dollar-cost-averaged, buying new shares at much lower prices.

    I wouldn’t recommend this approach for everyone and I’m just presenting it to add another option to the conversation.

    Because I was in it for the long-term and believed in these companies, I was willing to ride all the “emotion” out of the market for a large return (including the drop during the bubble). The caveat is I considered this money not immediately essential.

  • Anonymous

    Cost averaging is a very good technique in acquiring shares. It’s also an effective way of selling shares too. It’s impossible to time a stock and sell at a peak but selling 5000 shares in blocks of several hundred shares over a 1-6 month period has netted larger gains for me. Especially if the stock kept an upward trend like many have over the last two years.

  • sJ

    There are two sides to Dollar Cost Averaging.

    Some people have disliked it outright as a marketing trick and some people feel more safe with the technique.

    Steve: Thanks for the insight. That is very much true, DCA is not for everyone.