While I’m not a big country music fan, one of the few country songs I can sing along to is “The Gambler” by Kenny Rogers. While Kenny certainly knew how to make money, he also had a pretty good idea of how to keep it: “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” There’s a valuable lesson for investors in those lyrics.
Most investors (and professionals, too) spend a lot of time deciding which investments to buy and little time understanding when to sell. It’s crucial to have a security selection process in place, and to understand what you own and why you own it, even if it is just an index mimicking strategy.
Part of your process, even before buying a security, should be to outline reasons you would hold the investment even through downturn periods. This can help you resist the temptation to sell in the wrong moments, for the wrong reasons. It is also important to establish factors that could cause you to sell.
At The Center, some of our reasons to potentially change strategies within a portfolio are:
Security specific
Key personnel departure
Attainment of your price target
Increased correlation to other investments
Deviation from intended outcomes
Expenses
Goal specific
Change in circumstances (ie. entering retirement)
Change in risk tolerance
Change in the outcome needed to achieve long-term financial planning goals
Having these points in mind will make thinking about selling a position or changing your overall investment strategy (strategic allocation) easier and much less emotional.
While it is usually best to buy and hold over longer periods of time, knowing when to hold ‘em and fold ‘em doesn’t come easily. But with some thought, you can make prudent decisions when you buy and when you sell, because you never want to have to walk away … or worse yet … have to run!
Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.
Any opinions are those of Angela Palacios and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.