As difficult as is can be to decide when to buy an investment, knowing when to sell can be even more difficult. This is particularly true of losing investments. When our investments decline, the decision needs to be made whether to cut our losses, do nothing, or invest more to take advantage of the lower price.
I wish that I could say that there’s a tried and true rule, such as when an investment has declined by a certain percentage, but there are too many other factors. The type of investment, time held, tax consequences of a sale, risk/reward profile, and countless other pieces of information go into the decision. Another aspect of selling a loser is that you have to admit that you may have made a mistake. Far too often people hold on to their losers, hoping for a turnaround. What’s worse: getting out of an investment only to see it recover or to hold on and watch a continued decline?
As I’ve gained more and more investing experience, I also seem to be more ruthless when it comes to selling losers. I rarely regret selling a loser, but I often used to regret holding on to them and hoping for an improvement. As I said above, there are too many factors to give a rule about when to sell. The best method I’ve found is to sell a losing investment (or a winner for that matter) when the assumptions I made when buying it are no longer true. For example, if I invest because I believe that the company will report strong year over year sales, once the numbers come out I can make a decision. If my assumptions were correct, and the price has still declined, I may invest more. But if my assumption is shown to be faulty, then I’ll typically sell regardless of the state of the position.
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