A Time to Sell

A Time to Sell – stock market

Donald Jay Korn

Picking winners is only half the secret to stock market success. When to get rid of your dogs comes next.

YOU PROBABLY DEVOTE A CONSIDERABLE AMOUNT OF time to each purchase of a given stock or stock fund. Chances are you read a few publications (including this one), visit a Website or two, call your broker, and check out the company with anyone you know with the skinny on that business.

Buying the right stock at the right time is just the beginning, though. To really win on Wall Street–with regards to Kenny Rogers–you have to know when to hold ’em and know when to fold ’em. It comes down to a matter of timing. Learn the strategies now, so you can take full advantage of market rallies and identify tax benefits. Any of the following reasons might indicate that it’s time to pull the trigger on your beloved stock or mutual fund:

Cash concerns. Dawn Reshen-Doty is a principal at Danbury, Connecticut-based Benay Enterprises Inc., a business management company with clients in the publishing and entertainment fields. Last year, she needed $5,000 to help pay private school tuition for her son. “I decided to sell some of my Schering-Plough (NYSE: SGP) stock,” she says.

Reshen-Doty had held shares in the major pharmaceutical company for more than a decade, watching the value of her holdings grow from $10,000 to $40,000. “At that point,” she says, “Schering-Plough made up a large portion of my portfolio so I wanted to cut my exposure there.” She sold enough stock to cover her son’s education bills, effectively taking profits off the table and putting them to good use.

Similarly, Bobby Williams sold some mutual funds a few years ago. “I held a large number of funds, but I didn’t have enough cash reserves, according to my financial advisor,” he says. So the college administrator from Apex, North Carolina, redeemed the shares from two mutual funds–one of the American Century-Twentieth Century Growth funds and one of the American Century-Twentieth Century Select funds–and put the cash in the bank. This turned out to be a good move: Williams and his wife had two children in the next four years and found ample uses for the extra cash.

Loss of enthusiasm. Even the most exciting stocks might lose luster over time. If you find better opportunities elsewhere, move on. For Reshen-Doty, that was the case with Time-Warner (NYSE: TWX). She bought shares at $50 last April and sold them at a shade under $53 six months later, in October. “In this market environment, the company’s prospects didn’t seem as bright,” she says, taking into account the media giant’s pending merger with America Online (NYSE: AOL).

Investors should pay as much attention to a company’s fundamentals after they buy the stock as they do beforehand, says Edward Fulbright, a CPA and financial planner in Durham, North Carolina. “If you see earnings growth slowing down, that may be the time to sell,” he maintains. Let’s say a company whose earnings have been increasing at 20% per year commands a certain stock price; a decline in earnings growth to 15% or even 10% may cut that price sharply.

“Them are other numbers you need to look at,” says Fulbright. “For example, if a company’s revenues are going up 10% per year but its accounts receivables are increasing by 20%, that may be a bad sign. That means customers aren’t paying their bills. Another danger signal is a buildup of inventory, which means the company isn’t selling all the goods it’s producing.”

Mission accomplished. One well-accepted investment strategy is to establish a target price every time you buy a stock. Then, when (and if) a given stock reaches that level, evaluate whether you want to keep owning it. “I always set a target,” says Jim Stewart, a certified commercial investment member, a certification that represents real estate and investment strategy expertise, and a commercial real estate broker in Durham, North Carolina. “If the stock hits the target, I decide all over again if I want to sell or hold. This is good discipline for investors.”

Recently, Stewart says, he hit his original targets for American Express (NYSE: AXP) and Sara Lee (NYSE: SLE). “I still liked American Express so I continue to own the stock,” he says. “However, I didn’t think Sara Lee would go much higher, so I sold it.”

Fear of heights. “Let your winners run” is another stock market maxim. At some point, though, you may get the feeling that the race is about over. “I held JDS Uniphase (Nasdaq: JDSU) for about 100 points, from 160 to 260,” says Stewart. “At that point, I said my thanks and got out of the stock. I just didn’t think the stock could go any higher.”

Bulls and bears may make money but “pigs get slaughtered,” notes Dywane Hall, a principal in the Alexandria, Virginia, office of LPL Financial Services. “Even great companies may go up so much they get overvalued. When there’s a change in the economy or a company’s business model or, most importantly, investor sentiment, it may be time to get out of a stock, at least for a while.”

Doubling your money. To some investors, when a stock has risen 100% it’s time to sell but not necessarily time to bail out of the stock altogether. “You can pocket your winnings,” says Horace McClerklin, an attorney in Alexandria, Virginia. “That is, sell enough shares to take your profits but keep your original stake in the company.”

If you invest say, $10,000, and the investment climbs to $20,000, you might sell half your shares. This maintains your original $10,000 investment, if you’re still upbeat about the company, but spreads your risk to other investments that may have greater room for growth. “I’ve done this a few times recently,” says McClerklin. “I bought Amazon.com (Nasdaq: AMZN) and saw it split a couple of times because the value just kept rising. The same thing happened with Z-Tel Technologies (Nasdaq: ZTEL), a company that stood to gain from all the spending on [Y2K] problems. After I doubled my money, I took my profits and put them into other companies–Cisco Systems (Nasdaq: CSCO) and United Parcel Service (NYSE: UPS)–that I thought had greater growth potential at that point because their earnings’ curve was trending upward.”

Harvesting losses. Many investors have an aversion to taking losses: If a stock goes down after they buy it, they figure they’ll hold on until the stock gets back up to breakeven, or into plus territory. “It’s human nature,” says Hall, “not to admit to your shortcomings. As long as you haven’t sold the stock, you might feel you really haven’t lost money. With this kind of thinking, you may hold onto a stock for 10 or 15 years, waiting for it to make a comeback. All the while, you’re incurring a great opportunity cost because you’re not owning better companies.”

Taking your losses, though unpleasant, can be the right prescription for maintaining a healthy portfolio. Capital losses can be used to offset capital gains on other investments. What’s more, the proceeds from selling a stock at a loss may be reinvested in a more promising opportunity.

Reshen-Doty, for one, is not afraid to take losses. In late 2000, she sold both Sappi (NYSE: SPP), a South African stock trading in the United States as an American Depositary Receipt, and Packaging Corp. of America (NYSE: PKG) for losses. “I had bought them within the past year or so,” she recalls. “However, these companies and their industries were downgraded, so I sold them. I received negative reports from my broker [about the stocks] and I followed up with my own research in financial publications. If I read that there’s a new player in the industry or some new technology that might hurt a company that I own, I’ll sell.”

McClerklin says he sets limits when purchasing a stock. “The limits vary, according to the company, but they might be 10% or 20%. If a stock falls by a certain amount, from my purchase price, I’ll sell and move my money somewhere else. As the song says, “You’ve got to know when to fold ’em.”

McClerklin appears to be another Kenny Rogers fan. Taking losses beats taking gains, when you file your tax return. “Nevertheless,” says Hall, “taxes should come last in your thinking. You’re better off holding onto positions you believe will appreciate, even if you do wind up paying taxes when you sell.”

Once you decide to sell, you should pay attention to the tax consequences of your timing. “You might make a sale at a loss in November or December,” says Hall, “if you have gains earlier in the year to offset. If you’re going to sell at a profit, you might want to defer a year-end sale until January, which will give you the rest of that year to find an offsetting loss.”

According to the wash-sale rule, if you sell a stock or security at a loss you will not be permitted to take that loss on your taxes if you buy the same vehicle 30 days before or after the sale. That means over a 61-day period (including the day of the sale) you cannot purchase that same stock or security.

Such tactics have their place, according to Barrie Adedeji, a New York-based CPA, but investors shouldn’t take trading losses without careful thought. “Check first with your tax advisor,” she says, “to see if the loss will really provide you with a tax benefit. And check with your financial planner or investment advisor, too, to see what taking the loss will mean for your overall portfolio.”

Exit strategies. In many cases, people invest mainly to build up a portfolio they can tap during retirement. “In practice, you might want to withdraw about 7% per year from your portfolio,” says Andrew Burleigh, a financial planner in the Gardena, California, office of Financial Network Investment Corp. “If you have $300,000 saved up, for example, you could withdraw about $21,000 per year. As long as you continue to earn 7% per year, or more, you won’t deplete your holdings if the economy is stable.”

The catch, though, is that you’ll probably have to hold a mix of stocks and bonds in order to earn annual returns that go beyond the 7% threshold. Such a mix might earn only 2% or 3% per year, in interest and dividends. To make up the shortfall, some securities will have to be sold each year, which means you’ll have to decide what to sell.

“When I retired, I took my pension as a lump sum and rolled it into an IRA,” says Lewis Robinson, a former bus driver in Los Angeles. “Then I invested in several mutual funds. To provide retirement income, I arranged for the funds to sell shares automatically, every quarter, and to send me the proceeds.”

Burleigh, who is Robinson’s financial advisor, says that more of those sales proceeds come from growth-oriented stock funds rather than from fixed-income funds. The strong economy was an important factor in deciding what to do with Robinson’s retirement funds. “We’re comfortable with the current allocation [of Robinson’s portfolio] and don’t want to change it very much right now. The growth funds probably will make up the higher distributions, over time, maintaining the allocation,” says Burleigh.

Whenever you sell any security, you’re changing your investment allocation. If you pay careful attention to your holdings and toss in your cards when indicated, you’ll increase the chance that such changes usually will be for the better.

COPYRIGHT 2001 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2001 Gale Group