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When to Sell Your Stocks

By Ali Jaffery

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Starting a relationship is pretty easy, ending one is often quite hard. As it is with a love life, so can it be with investments.
Finding the right mutual funds to buy can be a simple, relatively painless event once you know the basics. Selling can be a nightmare. The first tendency, of most investors, is to sell when things are bad. The market falls 500 points and the reaction of most is to sell. Panic takes control and logic and good sense vanish in a fit of temporary mass hysteria. Panic feeds on itself. It doesn't help that the media fuels the fire with all the fringe prognosticators coming out of the wood work with dire predictions of financial collapse. It's difficult to avoid the urge to end the misery immediately before it gets any worse. This is probably the worst reason to sell. You don't want to become another lemming jumping off a cliff of financial disaster.
Some will make 10 to 20% on their investment right away and think to themselves, "Well, a bird in the hand..." or they might get a call from a broker who gloats about the wonderful profit their advice has made for them. It seems sensible to go ahead and sell out right now. Why take any chances? These "hair-trigger" sales can be as disastrous as a "panic sale"; you still end up taking a short-term approach.
If things continue to go well with the funds you have chosen there should be no need to sell, ever. However, occasionally things go sour and you could do better if you did get out. This one's tricky. A fund can have a bad year or two and still be doing quite well. The particular market in which they're invested could be soft or they could just hit a bad streak. If a fund consistently turns in performance far below its peers, it may be a sale candidate. Generally a fund that has substantially under performed other similar products for more than two years should be eliminated and replaced with a better fund.
The best approach to investing is the long-term approach. That means avoiding a sale at almost all costs. The best time to sell is at the time you need the money and not a minute before. In a perfect world it might work, but alas this one is far from perfect. That means you have to anticipate the future need and begin to sell prior to that time. The best way to sell before the need is to reverse dollar-cost average. That means you sell a little bit of your investment at regular intervals for a year or two before the anticipated need.
It's sometimes better to cut and run, but not often. You are usually better off sticking it out with most of the good funds you've selected. Eventually, even a dog will have its day.

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