I recently attended a four-day conference for members of the Australian Investors Association. Over that time, I listened to a wide range of experts discussing things like the future outlook for the economy, how to manage your investments, technical and fundamental analysis of shares, investing in bonds, equities, real estate, superannuation, managed funds and trusts. One topic of interest was when to sell Shares if prices are falling.
A number of these talks raised the issue of when to sell your shares. I realized that each speaker always referred to a share market chart of the ASX200 to prove the point. In particular, they were showing that in January and February of this year, 2016, the ASX200 was down by 20% It was explained that sometimes the market will ‘Get the Wobbles’ and recover, and sometimes the market has changed the trend from a bull market to a bear market. That is, the general direction of all the largest 200 shares in Australia is either in an upward price trend or downward price trend. ‘Getting the Wobbles’, is where the market moves down for a brief period of time and then recovers. The difference is very clear in hindsight, however, when a market has dropped 20% it is officially a bear market, until such time as the trend changes.
When to sell a share will be different for every investor. The reason is that for every person, who wants to sell a share, someone else wants to buy the same share. When there are more sellers than buyers, the price will fall and when there are move buyers than sellers the price will rise. Each person, holding a share, will need to make a decision – sell, hold, or buy more. The reason for differences include:
- You need the money for personal living expenses or you want to invest that money elsewhere regardless of what is happening to the share price.
- You have good profits and you want to keep these profits in case the price does not recover.
- The price of the share has fallen below your stop loss and you want to limit losses.
- You are a short-term trader rather than a long-term investor and need to exit any share trade which is not rising in price.
- The long-term investor may recognize that share prices will pull back or consolidate from time to time and is comfortable when the share price falls. The expectation is that after the share price correction, the share will continue to rise if the company’s financials are sound.
- Some investors will see a pullback of a share price as a buying opportunity to acquire more shares in a good business.
In my Book, Map Your Finances, I have a chapter explaining some of the basic methods of stock selection for your portfolio. I also give a review of my personal experiences of share investing over the last thirty years. After I returned home from the conference, I started to ponder on how you determine if your share ‘has the wobbles’ or it is time for you to sell the share based on your rules for when to exit the share. Remember everyone will have a different reason for selling a share.
The share market is not one market, but rather a selection of markets, just like when you visit the Victoria Street Markets in Melbourne, you will shop in different market sections, depending on whether you are buying cheese, fruit, or meat. Therefore when looking for market trends, a better index to watch is the index related to the share you are thinking of selling. For example, if you hold shares for Domino’s Pizza, you would look at the index for Consumer Discretionary. That is, are the shares related to Consumer Discretionary spending in an upward trend, moving sideways within a range, or in a downward trend? It is as important as the ASX200 is rising or falling, if the index for Consumer Discretionary type shares is doing something different from the average for all shares in the ASX200 index. The decision to sell or hold or buy more Domino’s shares should depend on your reasons for holding the share in the first place.
These are some considerations for various holders of Domino Pizzas:
- If the Consumer Discretionary Index is in an uptrend, check the financials of Domino’s to find out if there is a fundamental reason, why the share is being sold off. It may be something as simple as the share has just gone ex-dividend or the company has changed its estimates of future dividend payments. You will need to decide if you believe the price will recover in the long term and you don’t to sell, even though the price is falling.
- If the Index is moving sideways, you may recognize this as a period of consolidation for the Consumer Discretionary sector, and that until the charts break out into either an up or down trend, you are happy to hold you’re the Domino’s shares. On the other hand, you might think, that you have made good profits on your shares and that by selling the shares now, you can lock in the profits you have. Prices can move sideways for quite some time, and no one can predict the next trend. You may be better to take your profits now, ensuring no further fall in price, and then look to reinvest the money in a share that is likely to give you more growth.
- There are some people who love a downward trend because they believe with a good long term share of a sound business making good profits and return on equity, that a falling price is an opportunity to buy more shares as the price falls. These investors are often referred to as ‘Value Investors’. The best-known value investor is Warren Buffett. In Australia, I would consider Roger Montgomery one of the most successful value investors. This is not a strategy for the faint-hearted. You have to have the conviction, that everyone else is wrong and that you are right. Or that nothing has fundamentally changed and the business is still a good business. Me, personally, I don’t like to move against strong trends. If I do believe the share is a good long-term value share, I would probably sell now and rebuy when it is obvious that the share has moved to an upward trend. However, this is easier said than done, when you don’t have the benefit of hindsight.
Financial Planning Software for Shares
This may sound very easy for an experienced share investor but I am sure many are concerned about the time this takes to monitor their individual shares. One message which was loud and clear at the conference is that you can no longer just buy and hold forever. One service which will help you with this is a software called Stock Doctor (Lincoln Indicators). You can get a free 14-day trial. I would recommend you try it and watch a set of 10 one-hour videos which will teach you all you need to know on how you manage your share portfolio efficiently.
Financial Mappers lets you include a portfolio of shares in your financial plan. If you have different types of portfolios you can separate your share portfolio into different types. For example, you may have one portfolio that is looking for Growth and another for Income.
The rule for you should be to know with certainty why you have bought a particular share to fit with your portfolio and to align the purchase with your philosophy and risk tolerance. You should review your share portfolio regularly and act when a share no longer fits with the composition of your portfolio.
Glenis Phillips, SF Fin – Designer of Financial Mappers
Here are some additional articles I have found for you:
- How to invest in stocks in Australia – 2022 update (Finder)
- How to buy and sell shares (MoneySmart)