When one decides to sell some of their stocks or units in an equity mutual fund they always have a reason for it but in reality majority of them would often make up their mind to sell and then come up with a reason on why they should be selling
So in this video, we shall present a framework based on certain questions that you can ask yourself before selling any of your equity investments.
Topics Covered
00:00 Introduction
00:54 DO I NEED THE MONEY?
01:55 WHY NOW?
03:38 IS MY EQUITY EXPOSURE NOT IN LINE WITH THE TARGET ALLOCATION?
04:44 IS IT ACTUALLY UNDERPERFORMING?
06:52 WHO IS ON THE OTHER SIDE?
08:00 HAVE I ACCOUNTED FOR ALL THE COSTS?
08:54 WHAT WILL CHANGE MY MIND?
1. DO I NEED THE MONEY?
If your investment is tied to a critical financial goal falling due soon, you don’t have to think twice about selling some of your equity. But 95% of investors end up selling their equity investment when they don’t need the money and after selling it, they often wonder what to do with the money. If you don’t need the money, then you need to get a little more clarity on your thought process by asking yourself some of the other questions we have in this video
2. WHY NOW?
As an investor looking to offload units in an equity fund or some of your stocks .. you have to ask yourself this question. Why now?
Before you sell or consider selling always write down your most compelling reasons
Things like:
- Is competition eating into the market share?
- has the company lost a growth driver.
- Is there too much debt in the company?
- Are the returns on capital employed dipping consistently.
- Have dividends been curtailed?
- other qualitative and quantitative factors
3. IS MY EQUITY EXPOSURE NOT IN LINE WITH THE TARGET ALLOCATION?
Now, markets continue to change on a daily basis and if these changes were to move your asset mix beyond your risk tolerance or comfort zone then the selling and buying of assets to restore the balance are certainly warranted. What one should certainly avoid here is to sell assets aimlessly as this is more likely to harm your portfolio’s risk-adjusted returns rather than improving them.
4. IS IT ACTUALLY UNDERPERFORMING?
On most occasions, the equity mutual fund or stock which is sent to the chopping block is also the most underperforming one. This underperformance is often viewed in comparison to the overall stock market performance. Equity investing has always been synonymous with long-term investing.
There is no harm in offloading the chronic underperformers i.e. companies that have struggled in the past and more importantly, are likely to struggle in the future on account of:
1.Higher competition
2.Negative earnings
3.Deteriorating cash flows
4.Change in consumer preferences
5.Poor execution
The same pattern is often seen with equity funds as well
5. WHO IS ON THE OTHER SIDE?
When we sell a stock we have all the reasons for selling it but we never think why would anyone want to buy it? And that’s a very important question. Because if you are selling, someone else is buying then that someone has a very compelling and contrarian argument to what you are saying
And if you can somehow determine the buyer’s arguments, you have two massive advantages
1. The process might reveal flaws or biases in your thinking
2. It will certainly make you a better and a more humble investor
The world’s best investors are ones who have one strong opinion but nevertheless can also make a brilliant argument against their own views These investors possess critical thinking skills and never forget to look at the other side of the transaction before selling.
6. HAVE I ACCOUNTED FOR ALL THE COSTS?
Your sale price minus the buy price is not your actual profits. When you get down to selling some of your equities always ascertain the total cost you will be paying up to effect the sale transaction. This is particularly important for someone who buys and sells on the slightest up and down price movement as it is quite possible that the costs you pay, might be eating up much of your gains
7. WHAT WILL CHANGE MY MIND?
It’s a question very, very few investors think about but come to think of it, your own answers to this simple question can be pretty revealing. In other words, what we are trying to answer here is “If you are going to sell now what would make you a buyer again in the future and how would you decide when the time is right to buy again?”
Resources:
The Right Way to do Asset Allocation https://www.youtube.com/watch?v=MYZO5D7puTA
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