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Whenever Cynthia Basden is concerned over negative news reports about a company that she owns stock in, she calls her financial adviser and tells him to sell. Fortunately, her adviser, Charles Jenkins of Wachovia Securities, usually talks her out of it. “When I get those calls from Cynthia, I take a look at the company. And if nothing fundamentally has changed, I tell her to hold on to it,” says Jenkins.
All too often, investors act on their gut reaction to bad news reports about a company and end up selling a stock prematurely, sometimes taking an unnecessary loss. As Lynnette Khalfani points out in her book, Investing Success: How to Conquer 30 Costly Mistakes & Multiply Your Wealth (Advantage World Press; $24.95), there comes a time when all investors must sell their holdings, either to reap the profit or to cut their losses. But when and how that happens takes planning.
“It’s foolish to sell shares in a pharmaceutical company because that company gets turned down trying to put a new drug on the market,” says Khalfani. “People sell on news like that all the time, but that’s just a short-term blip that can be overturned with more research and development,” she explains.
Selling a stock should be considered for one of two reasons -either to achieve desired asset allocation or because of deterioration of a company’s fundamentals. “You should sell an individual stock because you are not confident of the future of the company,” advises Pat Dorsey, director of stock analysis at Morningstar Inc.
STRATEGIES THAT WORK
According to Khalfani, the single biggest mistake an investor can make is to purchase a stock without a plan for when to let it go. Establishing a sell strategy at the same time you buy a stock will help safeguard against making impulsive selling decisions. It should also help investors establish realistic expectations for a particular company’s growth -investors shouldn’t expect every stock they buy to double or triple their investment.
Basden, a 52-year-old branch manager at a bank in Long Island, New York, sets a high and low sell price for every stock she owns. “I will sell if a stock is capping out, or if I’ve made my expected profit,” says Basden, who admits she sometimes pushes the limits.
The economic health of industry sectors is also a key factor when deciding to sell. If an industry experiences a downturn or a crisis affects a particular sector, investors should carefully consider whether the conditions really affect the stocks they own. If not, there is no reason to sell. “After 9-11, people had a lot of worries that there would be a lot less travel. Carnival Cruise Lines stock dropped quite a bit after 9-11, and it was rational to think that maybe the value of the stock had left,” says Dorsey. “As it turned out, that wasn’t the case. People returned to travel a couple years later, and all was back to normal.”
Khalfani reinforces that selling at the first sign of bad news is not