Should You Sell a Sinking Stock? Owning a falling stock leaves many investors with a sinking feeling. There's a natural temptation to sell—a harrowing decision that's fraught with pain. Selling a plummeting stock hurts not only because of the bottom-line monetary loss, but also because of the psychological sting of admitting your mistake. As long as you stick with your stock, you can convince yourself the tide will turn. "Knowing when to sell is among the most widely debated issues for investors," says John Sawyer, chief investment officer of Compass Bank's Wealth Management Group. "There's no consensus on the best rule of thumb." Some experts advise selling any stock that drops, say, 8 percent. While this rule offers a kind of self-imposed insurance against devastating losses in a single stock, it also poses its own set of risks. In some cases, a stock can decline by 8 percent or more because it's part of a broad-based market sell-off. By abandoning a stock amid such a downturn, you might sell at the worst time, Sawyer warns. To evaluate the best course of action, evaluate the reasons behind a stock's decline. Did the fundamentals change? Is the market souring on that sector? Or is there something more irrational at play? "It's not always easy to determine the reason why a stock moves a certain way," Sawyer says. "But if the company you liked yesterday suddenly announces bad news today, you need to examine whether that changes your outlook." For Sawyer, the key to disciplined investing is to develop a consistent approach and stick with it. If you're worried about mitigating your losses in any one stock, devise rules for selling, write them down and follow them. You might, as an example, adopt a policy where you will sell half of your shares in any stock that drops 10 percent. Just make sure to follow the same rule on the upside as well as the downside. That way, you'll know when to sell a winner. "It's important to set up a game plan on both ends," Sawyer says. "From my perspective, consistency is far more important than whatever rule you impose. An average idea executed flawlessly is better than a brilliant idea that's inconsistently executed." Opinions expressed are those of the author(s) and do not necessarily represent the opinions of Compass Bank. June 2008 |
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