Topic: How To Invest

Should You Sell Your “Buy and Hold Stocks” if You Anticipate a Downturn?

when to sell stocks

Investors would do well to buy and hold stocks (or at least buy and watch carefully) instead of trying to time the market and sell when they anticipate prices are going to drop

Deciding when to sell and when to buy and hold stocks is the trickiest part of Successful Investing. We are programmed to run from danger, and every day the media brings new reasons to sell. But if you sell too often or too quickly, you’ll sell a lot of your best choices way too early, and you’ll never make any serious profits.

You’ll sometimes hear investors say that you shouldn’t “fall in love” with your stocks. This seems to make sense. You should keep an open mind on your investments, rather than falling in love with them and holding them forever, despite any adverse changes in their business or the field in which they operate. However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.


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Buy and hold stocks: Selling too soon can cost you

Often, the decision to abandon the buy-and-hold strategy seems to crop up when the market is down or at least in a state of turmoil that leaves investors uncertain.

For decades—as long as I’ve been involved with the stock market—some brokers have claimed that they favour the “buy and hold” investing strategy in principle, except when the market was so treacherous and unpredictable that their clients had to indulge in short-term trading, options or whatever to make any money.

Brokers have powerful economic incentives to recommend this kind of switch. The alternate investing methods they recommend involve higher fees. These fees leave their clients far less likely to make significant profits, but they virtually guarantee that the broker’s income will go way up.

Investors generally resist this switch. They recognize that you can’t predict market swings, but you can profit from long-term growth in the economy, and from the wealth creation that takes place in well-established companies. However, investors become more receptive to the idea in the late stages of a market downturn, when the “alternative strategies” have beaten “buy and hold” for a year or two.

The funny thing about all this is that “the traditional buy-and-hold strategy” is written about much more than it is practiced by most investors.

Buy-and-hold-till-I-get-bored and other misguided approaches to making a profit in the stock market

Most people describe themselves as buy-and-hold investors. But for many, their strategy is more like buy-and-hold-till-I-get-bored, or until I hear about something better on business TV programs.

Another common variant of the strategy is to buy-and-hold-till-the stock goes up, then take my profit and brag about it to anybody who will listen. When the stock goes down instead of up, these investors may switch to buy-and-hold-while-the-stock-goes-down, then-sell-when-it-goes-back-up-to-what-I-paid-for-it.

Of course, there are a variety of ways to build an investment portfolio. Some work better than others. Our Successful Investor philosophy has proven results, so we know it works.

Knowing when to sell a stock

In any bull market, conservative investors often wind up selling their best stocks way too early. Often they do so because their stocks seem to have gone up “too far, too fast”, or because “I can buy it back on a dip”, or because “they’re no longer cheap”. These are all bad reasons to sell.

There’s a large random element in all stock-price changes. When it seems to you that stocks have gone up “too far, too fast”, it may mean you’re mistaken about how far or fast they should go up. You may be unaware of good things that are going on out of sight and raising their value. Perhaps these things have already happened, and the stock is going up as the news spreads.

In a secular bull market, “they’re no longer cheap” is a particularly insidious rationale for selling. As I’ve written before, most stocks are cheap at the start of a secular bull market. As time passes and the rise continues, investors get more confident. A virtuous circle develops. Investors are willing to pay ever higher prices for earnings, sales and improving prospects, and this leads to higher levels of earnings, sales and prospects, pushing investor confidence and stock prices higher still. Eventually the fun ends, of course, but conservative investors tend to underestimate how long it can last.

If you sell when stocks are simply “no longer cheap” (or are “fully priced”, as a broker might put it), you will miss out on a lot of profit.

Buy and hold stocks with this portfolio strategy

Our “buy and watch closely” approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well. We start by applying our three-part Successful Investor approach for portfolio construction:

  • Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
  • Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
  • Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.

Do you buy and hold stocks more frequently than you sell them?

How long will you hold onto a stock that’s going up quickly? Do you ride out the market or do you try to sell as soon as you can make a profit?

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