Deciding when it is appropriate to sell a security is a common struggle for investors’ and, like many things with investing; there is no easy answer. There are many different strategies and viewpoints on the topic. We believe the important part with any sell strategy is that it limits the possibility of investors’ committing one of the worst behavioural biases: Loss aversion bias. This bias essentially speaks to the issue of selling your winners too early and holding on to your losers for too long. So instead of trying to determine what sell discipline is the best, we are simply going to discuss the different strategies that are out there. Which one an investor chooses depends on what fits with their personal situation. The important thing to remember is that once you decide on a process, you should stick to it.
The CFA Institute lays out two broad groups of sell disciplines: Substitution and Rule Driven. Substitution revolves around selling an existing holding due to the investor finding a better opportunity. Rule driven is more concerned with selling when a certain trigger is reached and has many strategies nested within it...