In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit where the user is asking whether to sell everything that is in red. Let’s dive in!

Investors are usually more interested in the questions of what to buy and when to buy assets, however, we think the more difficult part of investing lies in the question of whether and when to sell. Because at the end of the day, investors can own the same securities but could have widely varied outcomes depending on selling decisions.

Source: Reddit

When is the right time to sell?

In the book “Common Stocks and Uncommon Profit”, the famous investor Phillip Fisher said that “if the job has been correctly done when a common stock is purchased, the time to sell it is almost never”.

For example, investors who are skillful and lucky enough to own shares of Constellation Software (CSU), selling or even trimming the name at any time have looked like a mistake so far.

Some common mistake investors make

Most of the time, investors would try the game of selling at the top and buying them back at the bottom, which very few investors (if any) have done successfully and consistently over the long term.

In addition, investors’ psychology is usually that stocks are in the red, and investors will get out as soon as the investments move back to the cost basis. However, this is one of the most common mistakes in investing, making investors hold a loser for too long, thereby missing other opportunities that could earn better returns in the meantime.

A few rationale for the selling decision:

At the end of the day, it is not because stocks are heading south, investors should sell, and sometimes it may not make sense to hold. We think there are a few principles that investors could think of when it comes to selling:

1.   It is not the cost basis or psychology but the fundamentals of the companies that matter most. Stock picking is a difficult endeavour with mistakes being a part of the game, sometimes companies’ fundamentals have changed for the worse.

2.   When investments no longer meet the criteria that investors expect in the first place. For instance, investors buy into utility shares because of the sustainability of the dividend, if the company’s debt level is ballooning, which puts the dividend at risk, investors should sell whether it is a profit or loss investment.

3.   There are better opportunities that investors understand as well that are available in the market.

4.   Tax planning and other purposes unrelated to investing.

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Authors, directors, partners and/or officers of 5i Research do hold a financial or other interest in VFV at the time of publishing. The i2i Fund does not hold financial or other interest in the above companies or ETFs at the time of publishing