When to sell is one

of the hardest questions investors face. Sell too soon and you could sacrifice months or even years of growth; leave it too late and you might take a hammering. Anybody can get it wrong. Between 1999 and 2002, then Chancellor Gordon Brown sold 60 per cent of the UK’s gold reserves at US$275 (£133.10) an ounce, close to a 20-year low. This November, the price rose to $833 an ounce. Ouch!

Knowing when to sell is a neglected art because most equity research and tips focus on buying recommendations, says Stephen Barber, head of research at online broker Selftrade: ‘We all pay much less attention to selling, but it is just as important a skill when managing your portfolio.’

The answer partly depends on whether you are a value or a growth investor. Barber explains that ‘Growth investors pick stocks they believe will achieve consistently high returns over the long term. They don’t mind buying a share towards the top of its range if they expect it to continue to perform. Two reasons might prompt them to sell: either the stock starts to slide or their personal requirements change.’

Value investors are different. They see value in an investment that the market might have missed. ‘They should consider selling when the market finally reaches the same conclusion as they have, and they can take a profit,’ Barber says.

Taking a profit is generally a good thing, but you might also need to retune your portfolio. Barber continues, ‘Most investors regularly need to trim holdings and reinvest to ensure their portfolio is properly diversified and meets their asset allocation plans.’

Timing is everything

Every analyst has personal sell triggers. Graham Spooner, investment adviser at The Share Centre, says investors in individual equities should consider selling on the first profit warning: ‘Most companies can’t wave a magic wand and turn things round quickly. One profit warning is often followed by another.’

Don’t cling too tightly to a drowning stock, he warns: ‘The question isn’t whether the stock will revive, but whether your money could be put to better use.’

Jim Wood-Smith, head of research at broker Christows, says selling a stock depends on why you bought it in the first place. ‘If you were aiming for quick short-term gain, you will treat that investment very differently from one you are buying as a long-term hold.’ If you expected the stock to blaze upwards, you might want to set a target to sell once it grows say, 20 per cent.

However, if you believe in the long-term potential of a company, any short-term surge is neither here nor there – with one exception. Wood-Smith observes that ‘Sometimes a stock will go up so much you simply have to sell, because it is unlikely to hit such heights again. Vodafone is a good example. The time to sell was in 1999, when the price hit 400p. Vodafone’s share price is just half that value now.’

Clear thinking

Keep a clear head because the decision to sell is clouded and confused by emotion. Many investors are reluctant to admit they have made a mistake. ‘Private investors are generally more reluctant to sell after a loss. They kid themselves that the share will bounce back and fear they may regret selling. This is where a stop-loss can come in handy. It makes sure you don’t hold onto the stock for too long during the downside,’ Wood-Smith says.

And once you have sold, avert your eyes. He adds, ‘There is an old adage – what you don’t own can’t hurt you. If you bought at 100p and sold at 200p, you have done very well. If it subsequently rises to 300p, that’s irrelevant.’

Stop-losses can take the emotion out of selling, but use them wisely. There is little point taking out a ten per cent stop-loss on a volatile technology stock, because it could easily breach that limit the next day, triggering a sale, before bouncing back.

Make sure your stop-loss remains relevant, says Robbie Burns of investment website Nakedtrader.co.uk: ‘If you bought a share at 400p and set the stop-loss at 350p, but the share subsequently rises to 500p, you should raise your stop-loss to 450p.’

He recommends setting up what he calls a trading stop-loss, which increases in line with the share.

Gradual withdrawal

Always remember that you don’t have to sell the entire stock. Burns says, ‘You could dump just half your shares. If you have made a good profit, take some and run the rest of the stock. That way you won’t kick yourself if it continues to climb.’

Some investors hold onto stocks for too long, while others panic and sell too quickly, says Colin McLean, co-manager of SVM Global. ‘They don’t like to suffer any kind of loss and assume a short-term setback is permanent. This means they offload much too soon.’ Similarly, many are too quick to cash in when a stock has done well. McLean adds, ‘They are too keen to take a profit – it makes them feel good. But the question is whether there is more upside growth in the pipeline.

‘You have to be dispassionate. Carefully analyse why a stock is sinking and its prospects for bouncing back. Is the company poorly run, or are wider market factors to blame?’

McLean warns against falling under the spell of ‘lionised individuals’ such as Fred Goodwin, chief executive of Royal Bank of Scotland: ‘He was behind the NatWest and ABN Amro takeovers, which gave him a big profile.

But RBS shares have actually underperformed dramatically over the past couple of years.’

Don’t put too much faith in brand names either – remember, you are buying shares, not companies. ‘Investors see names like AstraZeneca, the major banks, Kingfisher and Dixons as low-risk, blue-chip investments, but they haven’t actually performed well lately,’ he says.

Another of McLean’s maxims is to avoid getting too attached to the dividend yield. ‘Dixons has offered a very high yield of nine per cent, but has actually been a terrible investment.’

Finally, don’t sell too often. ‘My fund, SVM Global, is a £250 million investment trust. We turn over less than one fifth of our portfolio each year. If you believe in a stock, you should be looking to hold for the longer term,’ McLean says.

Learning to be patient

Mark Dampier, head of research at Hargreaves Lansdown, says the hardest skill to learn is patience: ‘We know how successful Anthony Bolton was at Fidelity Special Situations, but there were a few years in the1990s when he didn’t perform. You must understand the manager’s processes. That will show whether they are picking bad stocks or whether their sector is out of fashion.’

Keep your head and don’t follow the mob. Dampier says the time to sell is when everybody else is buying. ‘If an asset manager has just started to advertise a fund, or the sector is suddenly awash with new launches, that could be a good sell signal.

‘Be careful when a sector gets too popular, as happened with emerging markets in 1994 and technology in 1999. Often the crash isn’t far away. That could be the same with emerging markets now. They might be okay for another six months, but now is the time to consider getting out rather than piling in.’

There is no simple answer to the question of when to sell. The decision rests on a host of factors. One thing you shouldn’t do is try to time the market, says Patrick Connolly, certified financial planner at Towry Law: ‘Nobody can get market timing right on a consistent basis, although this doesn’t stop people from trying. As JK Galbraith said, “There are two classes of forecasters: those who don’t know and those who don’t know they don’t know.”’