When is it Time to Sell your Winners (or Losers)?

Investors are continuously inundated with investment advice about what to buy. Everyone seems to have a good stock tip. Rarely though, does anybody talk about the often more difficult decision of when it makes sense to sell an investment. When good quality stocks are making gains in the market, the general rule of thumb is "let profits run." Stay with your investments until research targets have been met, and not revised upward. Or, if there is a downturn reflecting a significant change in investor sentiment, then consider shifting out if the research outlook has been revised.

When your investment performs poorly, the decision on when to sell gets even trickier. Human nature gets in the way, and we either don't want to admit we made a mistake buying the stock in the first place, or we hope the stock will come back in the near term. Unfortunately, time and time again, poorly performing investments can usually be tied to deteriorating fundamentals and therefore, a loss will just get worse over time. Rarely do these deteriorating situations turnaround.

As a consequence, we end up holding on to poorly performing stocks much too long, watching them sink ever lower. An effective way to prevent hanging on to these persistent losers is to set up a "stop loss" point. This is a predetermined price, which triggers the sale of the investment.

This strategy also works well with your winners. Let's consider an investment that has performed beyond your expectations. Even though you still feel there is further potential upside, you are now considering locking-in your gains. By realizing a capital gain, you may not only create a tax liability in the current year, you may also miss out on any further price appreciation. If we use the "let profits run" strategy, we will simply reset the "stop loss" point to an appropriately higher value and continue to hold this good quality investment.

Having this fundamental base to work from makes the decision of when to sell, or when to hold, much easier.

The information contained herein is considered accurate at the time of posting. CIBC, CIBC World Markets Inc. and CIBC Investor Services Inc. reserve the right to change any of it without prior notice. It is for general information purposes only. Clients are advised to seek advice regarding their particular circumstances from their personal tax advisors.

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