How often do you trade your stocks? Do you turn over your portfolio an average of once a year, twice a year or 12 times a year? Do you know when to sell stocks at the right time? In this age of super-fast computers that are programmed to trade in nanoseconds, should you trade your stocks more often to keep up with the ever-changing stock market?
The answer to these questions will vary greatly based on your trading strategy. High-frequency day traders may turn over their portfolios multiple times during a single day. Investors that primarily use retirement vehicles like 401(k)s may never trade at all.
But for some retail investors who own individual stocks as well as retirement assets, it turns out that even if they do a modest amount of trading, it may still be too much.
When to Sell Stocks and the Benefits of Trading Less
Mark Hulbert, founding editor of the Hulbert Financial Digest, has been tracking investment newsletters for a good many years. His Digest follows the investment performance of hundreds of investment advisory newsletters. The reports provide investors with a reliable source to determine which newsletters are offering good advice and which newsletters are not.
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Hulbert and his staff compiled a huge database to determine when to sell stocks, if at all, by looking at how the frequency of portfolio transactions impacted performance results. He used more than three decades of history from hundreds of newsletters.
For each newsletter, Hulbert and his staff compared how a newsletter’s portfolio actually performed in each year against how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year.
Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during each year. Furthermore, in EVERY year the frozen portfolios performed better than their actual portfolio counterparts that included trading during the year.
In 2010, for example, the 500 model portfolios that Hulbert Financial Digest tracks gained an average of 14.6%. Not bad, compared to the Standard & Poor’s 500 Index gain of 12.8% that year. However, if the 500 model portfolios had been frozen at the beginning of 2010 with no transactions allowed, the resulting gain would have been 18.0%. Wow!
An additional study lends credence to Hulbert’s findings. Finance professors Terrance Odean of the University of California-Berkeley and Brad Barber of the University of California-Davis studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.
Odean and Barber’s study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been better off had they done nothing.
When to Sell Stocks
So the sixty-four thousand dollar question is: How do you know when to sell stocks, and how often should you trade your stocks? There is no answer because it all depends on the type of stocks. However, here are a few tips for when to sell stocks:
- Conservative investors tend to hold onto their stocks for about 18 months, on average.
- The data and studies seem to suggest that the longer you hold, the larger the profit.
- Use sell targets with the goal of achieving maximum gains within two years. Sounds idealistic, to be sure, but if half of your stocks reach their targets, you will easily beat the market.
Mike Cintolo is a growth stock and market timing expert. His Cabot Growth Investor, with its legendary Model Portfolio, is recommended for all investors seeking to grow their wealth. Here are three tips he has shared about when to sell growth stocks, specifically:
First, take a look at the overall position of your portfolio, preferably when the market is NOT open. If you’re already 50% in cash and the stuff you’re invested in is larger-cap, more stodgy stuff, you should approach things differently than if you’re fully invested in a bunch of high-flyers—in the first case, you can be more lenient with what you still own, while you might prune a few things right quick in the latter case.
Second, when it comes to paring back, you should prioritize your biggest losers and your biggest positions. Your biggest losers are (more likely than not) your worst positions. And your largest positions are where your most risk is found.
Third, set some reasonable stops for these positions and stick to them—try to base it on a combination of the chart and your own risk tolerance. If you still haven’t built up any cash, it’s fine to throw your worst couple of positions overboard right away.
When to Hold Stocks
So while you’re wondering when to sell stocks, it turns out that holding stocks for longer periods of time has another benefit - receiving dividends! Dividends are the regular cash payments that a company sends to you or your brokerage account. You can, however, instruct the company or your broker to reinvest your dividends into additional shares or fractional shares.
Dividends are the payments of a company’s hard-earned profits. A company’s ability to continually pay a dividend provides concrete evidence that the company is performing well.
When looking for good companies that will provide above-average stock-price appreciation and increasing dividends, look for several factors. These factors include strong balance sheets with low debt and lots of cash. We prefer companies that have paid dividends for decades where increases are common. And we check to see if the company is likely to continue to grow during the next several years.
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*This post is periodically updated to reflect market conditions.