denis kalinichenko Shutterstock The United States of AmericaSThe stock market has soared in the last 18 months, fueled in part by investor FOMO (fear of missing out).Investors can be rash when buying stocks, but it’s their selling decisions that get them in trouble.
When it comes to buying stocks, professional investors are skilled, but when it comes to selling stocks, they underperform the market.That’s the conclusion of a recent working paper by four researchers, Selling Fast and Buying Slow, which looked at the trading activity of over 700 professionally managed portfolios.
When compared to a random-selling strategy, portfolio managers lose 80 basis points per year on average due to poor selling decisions – or the equivalent of 80 on a $10,000 investment.
Market pros are prone to making some of the same mistakes as all investors, such as ignoring selling notes, according to Adam Grossman, founder of Mayport Wealth Management, who wrote about the study in a post for the website Humble Dollar.He tells Money that this study should serve as a cautionary tale about how difficult it is to trade individual stocks.If you can, invest in an index fund because it protects you from your own baffling decisions.
Common Investing Mistakes and How to Avoid Them
Investors are actually pretty good at buying stocks that will outperform their benchmarks, according to the study, but they don’t devote the same amount of effort to selling them.
Instead of focusing on a stock’s future returns prospects, the study finds that portfolio managers are prone to behavioral biases such as how current the information prompting the decision is, the stock’s weight in the portfolio past returns, or when they’re stressed.
They appear to be preoccupied with finding the next great idea to add to their portfolio, and selling appears to be primarily a means of raising cash for purchases, according to the study’s authors.
To make better selling decisions, Grossman recommends following a four-step plan: Treat selling with the same care as buying, have a plan with decision rules for selling stocks, think about how each stock fits into your overall portfolio, and don’t let the size of the investment cloud your judgment.
Liz Young, head of investment strategy at SoFi, says that a sell strategy is just as important for retail investors as it is for professionals.And, she adds, establishing these kinds of rules to trigger a potential sell decision will help you keep your emotions in check when the time comes.
My answer is no.One tip is to pick a percentage drop and only evaluate the stock once it reaches that level, according to Young.Here’s how it works in practice: If you set a 20% loss threshold – the point at which a stock enters a bear market – you should only re-evaluate your investment thesis at that point to avoid being too active in your portfolio or reacting to short-term factors.You may decide that now is not the time to sell and that now is the time to buy.
Furthermore, you do not have to sell all of the shares in your portfolio – or all of them at once.Young and Grossman both advise using a reverse dollar-cost averaging strategy for selling, in which you sell shares on a regular basis, just as you would when buying.
If a stock has ballooned to a large weighting in your portfolio, this strategy can be beneficial because selling all at once could be extreme, according to Grossman.
Dollar-cost averaging is a good way to protect yourself if the stock price fluctuates after your sell strategy has been triggered, Young adds.
Remember to factor in taxes.
Another important factor to consider in your selling strategy is the impact of capital gains taxes on investment profits, because a large gain for one stock in your portfolio may not be the best reason to sell, according to Grossman.Instead, he suggests waiting for other triggers in your sell strategy to prompt that decision.
While the most obvious reason to sell a stock is to make money, laying out a selling strategy ahead of time can help ensure that your decisions don’t hurt your performance – or cause you to second-guess your decision if new information emerges that causes a stock’s price to rise again, according to Grossman.Try to see your portfolio through a lens that can help you organize it and tell you when it’s time to sell.
Copyright 2021 Ad Practitioners LLC is a company that specializes in advertising.Disclaimer: All Rights ReservedThis article was first published on Money.Money may receive compensation for affiliate links on Money.com.Opinions expressed in this article are solely those of the authors and have not been reviewed, approved, or otherwise endorsed by any third-party entity.Offers are subject to change at any time without notice.Read Money’s full disclaimer for more information.
The information you’ll find on this site is always objective.However, we may be compensated if you click on links within our stories.