When to Sell?

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By Jeff Fischer (TMF Jeff)
April 24, 2000

[The following Drip classic originally ran on June 8, 1999.]

The desire to quickly sell a recent investment should rank with a desire to swim across the English channel during the height of WW II, or with a desire to wear a black winter snowsuit and stand in the middle of the Old Town square here in Alexandria, VA, on a humid, 100-degree sun-drenched day.

Selling quickly isn't Foolish when you buy good companies. The goal is to hold forever, if possible. Even so, there can come a time when you need to sell or when you should at least consider selling. Fools frequently ask on the discussion board and in e-mail, "When should a Foolish investor sell a Drip investment that became a mistake? And how do we know to sell?"

There are few set rules (i.e., "always sell when...") because investment situations vary greatly, but there are many guidelines to consider.

If a company is failing you, you should consider selling if the failure appears to be long-term or permanent in nature. Don't be a hero when your ship is sinking. When you realize that you have made a mistake (and that could take months of thinking -- don't rush to sell, just as you shouldn't rush to buy), admit the mistake and seek higher ground. Consider selling if your company:

  • Is beginning to consistently lose money rather than make it, or is consistently making less money than before or less than hoped for over a sustained time period.
  • Is consistently accumulating debt rather than cash without apparent growth benefits (smart acquisitions can be made with debt).
  • Is falling behind industry changes and management seems to be foundering.
  • Has changed its focus or business to something that you don't understand or admire.
  • Institutes unreasonable fees in its direct investment plan.
  • Cancels its dividend payment without apparent benefit to the growth of the company, meaning that the dividend money saved isn't reinvested in the business for growth, but goes to finance debt or losses (this indicates that something is amiss).

Finally, consider selling if:

  • You think you've found a better investment.

Do not sell just because:

  • You think the stock market or your stock is temporarily too high (decrease your monthly investment if you must do anything about this often temporary belief).
  • Your company announced bad news that it will get past, including business slowdowns for economic reasons, foreign currencies, the failure of a single new drug at a pharmacy company. Selling on a downturn is a poor move for many reasons. Drip investors usually want to buy on downturns.
  • Someone (a broker, a co-worker, a friend) thinks you should sell.
  • You want favorable tax consequences. Selling a losing stock to offset gains in another stock is a poor investment decision, and, in general, you shouldn't let taxes affect your investment decisions except when considering short-term and long-term tax consequences under a neutral investment scenario.

The preceding are subjective reasons to sell or not to sell. There are many more scenarios and this barely touches the surface.

Practical Issues of Selling
There are practical reasons to sell stock, of course, including when you need money. Do try to exhaust other avenues first if you're selling only due to a short-term cash crunch; you'll lose the dollar-cost averaging benefits you achieved as soon as you sell, and you'll need to pay taxes on gains. If you do need to sell, the only recommendation we have is this: consider keeping a minimal amount of shares in the plan (in most cases, one share will suffice) so the account isn't closed. This way you can always begin to invest in the plan again without fees or the enrollment hassle -- even years later.

Selling a portion of your shares is easy. Just specify the number of shares you wish to sell on a plan statement (or, with some plans, over the phone), and typically within a week or two your shares will be sold and you'll be sent a check. Another option is to have the plan administrator mail a stock certificate to you that you can then sell through a regular broker. This might make sense if your plan charges high sales fees.

Completely closing a plan and selling all your shares is equally easy. On a plan statement, ask to close the plan and request the sale of all shares and a check payment, or request a stock certificate for the shares.

You might also consider selling if your direct investing career finds you eager to try different types of investing, from buying young, fast-growing Rule Breakers, to the Foolish Four, to Rule Makers or Boring Port stocks (many of which have direct investment plans).

In the end, know that selling a winning company almost never pays in the long run. The GEs and Coca-Colas of the world eventually climb to a higher plain. The ultimate goal is to find great companies that you can hold into -- and through -- retirement. As you retire, perhaps you'll merely cancel your plans' dividend reinvestment option and live on cash dividend payments alone, never needing to sell much or any of your stock. Oh, you'll be the favorite grandparent of all!

Fool on!

Drip Portfolio

4/24/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP1/160.22%$28.13
INTCINTEL CORP3/40.65%$116.13
JNJJOHNSON & JOHNSON1/42.76%$83.88

  Day Week Month Year
To Date
Drip 1.42% 1.42% -1.53% 13.52% 47.48% 15.21%
S&P 500 -.33% -.33% -4.59% -2.68% 52.31% 16.58%
S&P 500(DA) -.33% -.33% -4.59% -2.68% 54.93% 17.30%
S&P 500(DCA) n/a n/a n/a n/a 25.96% 8.78%
NASDAQ -4.43% -4.43% -23.84% -14.42% 121.87% 33.71%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg

Trade Date # Shares Ticker Cost Value LT $ Val Ch
  Cash: $24.47  
  Total: $5,107.50  

• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.