Harvey Jones sets out the ground rules for deciding when to eject an investment from your portfolio

When to sell is one of the hardest investment decisions of all, arguably much trickier than deciding when to buy. It is virtually impossible to get it dead right. People often sell too late, after their stock or fund has already crashed, or too early, when it still has some fuel left in the tank. There is no absolutely correct time to sell (although December 2007, before the credit crunch started to take its toll, would have been pretty good).

Letting go of a stock can be hard. If it has fared badly, it is always tempting to hold on that little bit longer in the hope of recouping your losses, rather than admit that you made a mistake. But you may also be reluctant to wave goodbye to a stellar performer, in case its good run continues.

You have to accept that mistakes are inevitable, says Simon James, partner at Gore Browne Investment Management. ‘Nobody can see the future. What happens to a stock after you sell is irrelevant, so don’t brood over how it performs in future. There are other opportunities out there.’

Before selling, James says you should ask yourself these questions: ‘Why are you investing? Are you a short-term trader or a long-term investor? If you are investing for rapid growth, you will have a different perspective from somebody investing for rising dividend income or steady growth over the longer term.’

Your personal circumstances will also affect your decision. For example, you might need to sell a stock you still like, either to raise capital, or for capital gains tax planning. It is impossible to come up with a single rule of thumb. ‘Recent volatile market conditions have destroyed many people’s selling strategies. You can’t be too rigid,’ says James.

Minimising losses
Some investors take the agony out of the decision by automatically selling a stock once it has, say, fallen 10 per cent or risen 25 per cent. You can make this a little more sophisticated with careful use of stop-losses, says Nick Raynor, investment adviser at The Share Centre: ‘You could set a stop loss that automatically sells the stock if it falls 10 per cent. The danger is that the stock may fall 11 or 12 per cent, triggering your stop loss, then quickly recover. That way you get the downside, but miss out on the upside. Stop-losses are dangerous, because they are a good way of locking in your losses.”

If a stock is rising, you may have better luck with a trailing stop-loss, which triggers a sale if the stock retreats, say, 10 per cent from its current market value. ‘If the share continues to climb, the trailing stop-loss climbs with it, protecting more and more of your gains, while still allowing you to benefit from future growth,’ explains Raynor, although he does offer one general rule of selling: ‘Never sell a stock when it is still going up, because this suggests it still has potential. But if it has enjoyed a good run, then starts to run out of steam, it may be time to sell. The next move could be down.’

Looking ahead
If the stock looks weak for five days in a row, find out why. ‘Stocks or indices sometimes struggle to break above a certain limit,’ Raynor explains. ‘If they try three or four times, perhaps there isn’t enough momentum there, and this could be a good sign that it is time to sell.’

You don’t have to sell all your stake in one go. ‘One of our customers recently made £5,000 on a £10,000 stake in housebuilder Barratt Homes. He still liked the company, but wanted to diversify and reduce his exposure to risk. We suggested he invest his £5,000 profit elsewhere, and keep his original stake in the company. It is a simple strategy, but he hadn’t considered it,’ he says.

If you know you have to sell on a set date, give yourself as much room for manoeuvre as possible. ‘Don’t pen yourself in by leaving it to the last minute,  because you are exposing yourself to ever greater risks,’ Raynor says.
If you find the decision to sell a hard one, don’t worry, you’re not alone. So do the professionals. Stockbrokers love to recommend buying a stock, but they hate recommending when to sell, says Jeremy Batstone-Carr, head
of research at stockbroker Charles Stanley.

‘It is rare for a broker to issue a ‘sell’ recommendation. You see plenty of recommendations to buy, hold or reduce, but rarely to sell. You sometimes see it after a senior executive leaves or a price target is achieved, but you won’t see it very often, because the decision is so hard to get right. Brokers don’t like sticking their neck out in this way.’

Surrounding conditions
Your attitude to selling should also vary depending on whether you are investing in a large- or small-cap stock. ‘Large-caps are very heavily researched, so people know all the bad news, and you are less likely to spot a major problem, such as a black hole in the accounts. But smaller-caps can often face fundamental problems, and have greater volatility, so you need to keep an eye on them, and be prepared to act quickly.’

The decision to sell also depends on current market conditions. Right now, conditions are rather special. Clem Chambers, chief executive at stocks and shares website Advfn.com, says that in normal market circumstances there are three reasons to sell: ‘When you can’t sleep at night because you are worried about losing money, when you have hit your original target, and when you have forgotten why you invested in that share in the first place.’

Another reason is that you have made a heap of money. ‘If you were lucky enough to invest £10,000 in a bombed-out bank in February and are now sitting on £60,000, you might want to sell, say, £50,000. You can sell a lot, because you have a lot of it. You are also locking in your profits,’ he says.

Sometimes you have to be ruthless. ‘Say a stock has fallen from £1.30 to £1. It is tempting to hold on longer, watching it drop to 90p, 85p, 80p, waiting for a recovery that never comes. You can lose a lot of money that way.’

Uncharted waters
Chambers says that investment rules are made to be broken, and this year’s recovery trashed many of them. ‘I normally sell after a stock has risen 25 or 30 per cent. But after going on a buying spree between November and February, I’m sitting on stocks such as Barclays and Pendragon that are up more than 500 per cent, and I’m hanging onto them, because I believe there is more to come.’

Paradoxically, if you buy a company that is heading for the mortuary, selling becomes futile. He adds, ‘I’m holding several companies that could go into administration, but I’m not selling because I won’t get much if I do. And if they do survive, their shares will fly because they are priced on the assumption that the company is finished.’

Finally, you shouldn’t be ruled by fear. ‘Don’t be afraid to sell. There is always another stock out there. There is always another profit out there. There is always a better share, you just haven’t found it yet.’ And once you have sold a stock, forget about it. Don’t keep going back to it. Move on, explore other companies, sectors and markets. Buy.