Published December 2001

Take time, care
before selling a stock

By Eric Cumley
Columnist

It’s hard to say goodbye to your child when she’s heading off to college. It can be hard saying goodbye to the old neighborhood. And, for some people, it’s hard saying goodbye to stocks that they own. But this kind of reluctance can be costly. That’s why it’s important to know when it’s a good idea to sell stocks — and when it isn’t.

Of course, there always has been one basic rule about buying and selling stocks: Buy low and sell high. This is good advice, except for one thing: It’s almost impossible to follow.

There are a lot of investment experts out there, but no one can accurately predict when the market will reach its high or low points. Consequently, you can’t really use the “buy low, sell high” rule to consistently govern your transactions.

Does this mean that share price is irrelevant in the decision to sell a stock? No. Price can be a factor, though it shouldn’t be the only factor.

At what point does price enter into the equation? There’s no magic formula, but keep this in mind: If a stock you own has fallen 50 percent in value, its price will have to increase by 100 percent just to get you back to where you started.

The hard truth is that, at some point, a depressed stock may no longer be worth keeping — particularly if the proceeds from selling it could be invested in a more promising opportunity.

Looking beyond price, what other reasons might you have for selling a stock?

You can start by looking at why you purchased the stock in the first place. Did the company have a solid history of growth in sales and earnings? Was it part of an expanding industry? Did it have certain attributes — cutting-edge technologies, a superior business model, etc. — that gave it a competitive edge? Did it have a seasoned, forward-thinking management team, or a rich product pipeline?

Now, ask yourself if any of these factors have changed. If so, then you may want to consider selling the stock — because if a stock isn’t something you’d buy today, it may not be something you want to own tomorrow, either.

But if the original factors that caused you to buy the stock are still there, you probably wouldn’t want to sell it unless your needs have changed since your original purchase.

For example, if you bought a growth stock many years ago, but now you feel the need to rebalance your portfolio more toward dividend-paying equities, you may want to sell.

As you can see, you may not always receive a clear-cut signal on when you should sell a stock. So take the time you need to make a reasonable decision — and weigh all the facts carefully before issuing the “sell” order.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

Back to the top/December 2001 Main Menu