Blue chip shares will provide you with the best gains—but when should you sell them?

blue chip shares

Buying high-quality blue chip shares will maximize investor returns—but you also need to know when to sell them.

We recommend that most investors hold the bulk of their portfolios in blue chip stocks. That’s because blue chip shares offer potential for capital gains growth as well as regular dividend income.

This past autumn, a long-time reader and portfolio management client asked a question that other investors may wonder about in today’s turbulent markets. He wrote,

“You constantly remind members to have a balanced portfolio and strategy for long-term success when investing. But when do you take profits? You have mentioned a couple of times to sell, such as when a stock makes up too much of your total portfolio, or if a company shows questionable management or business decisions. My main question is why don’t we sell when stocks move up and there are profits to be had?”


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I often asked myself that question in my first decade or two in the investment business. In hindsight, it always seems easy to spot when you should sell you blue chip shares. Spotting market tops and market bottoms is simple. But trying to spot those tops and bottoms as they occur is harder. I investigated all sorts of market theories and signals that purport to tell you how to do it. They all seem to have “worked,” at least some of the time. But none worked consistently.

The problem is that market tops and market bottoms can take place in response to anything that is going on in the market, the economy and the world. But buy and sell signals focus on a tiny smidgen of that vast amount of data. A market signal “works” as an investing strategy when the market is responding to the same slice of data that the signal focuses on. It quits working as soon as the market’s focus moves on to something else.

What is a blue chip stock?

Blue chip stocks are big, well-established, dividend-paying corporations with strong business prospects. These are companies that also have sound management that should be able to make the right moves to keep competing successfully in a changing marketplace.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects in expanding markets.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Investing bonus: Profit from stock selection rather than stock market predictions

Investors who succeed over decades—the Warren Buffett’s of the investment world—rarely, if ever, talk about spotting market tops and bottoms. They are far more likely to talk about successful investments than wondering when they should sell their blue chip shares. Most have come to see, often after a period of costly stock-trading errors, that you make most of your stock-market profits through stock selection rather than stock market predictions.

I always have an opinion of some sort about the market’s outlook, and I’m happy to share that opinion with our readers. When I first replied to our client’s question last fall, I said: “I see further weakness in the next month or two.” And the market did indeed take several steep declines….

Why not sell, if the market appears to be headed down as it was then—and then buy back in a month or two when the market is lower?

Avoid selling your blue chip shares way too early

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Have you profited from selling some of your blue chip shares? Could you have been more profitable if you had waited just a little longer? What piece of information was instrumental at helping you make your selling decision? Share your experience with us in the comments.

Comments

    • Many investors mistakenly assume that frequent profit-taking is the key to long-term success. Few brokers disagree, since they make money every time you buy or sell. But in the long run, taking profits simply because profits are available is going to cost you money. That’s because of the way the stock market works.

      Stock prices rise 10% to 12% a year over long periods, on average, but individual cases and years vary widely. Even good stocks sometimes go sideways for decades, while others turn out to be ‘ten-baggers’ with gains of 1000%. To make serious profits, you need to hang on to your best performers for years. If you are too quick to sell stocks that have gone up, you may avoid some 20% setbacks, but you’ll also miss out on some 200% gains.

      As one successful investor said long ago, “I’m a rich man today because I was smart enough to buy Canadian Tire at $0.50, and too stupid to sell it at $2.00.”

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