By Andrew Leckey

Stocks and mutual funds are investments, not friends.

They have nothing to do with a dearly departed relative who willed them to you.

They harbor no warm feelings about how young you were when you purchased them or whether you once worked for their company. They have no memory of how well they did for you a decade ago.

Selling has zero impact on the investments' psyche.

"Investments don't love you back and don't know if you own them or don't own them," asserted Paul Nolte, managing director of Dearborn Partners in Chicago. "Be dispassionate because sentimental reasons are why investors often hold on for so long."

Evaluate what an investment has done for you lately before making any decision.

"Financial and energy stocks are areas that we believe investors should consider selling now," said Nolte. "In the case of financials, it is difficult to get your arms around what the companies really own or how much of it is toxic, while in energy we have already gotten some nice profits."

Wall Street analysts have a way of avoiding harsh decisions: They give stocks buy, hold or underperform ratings while they follow them. But rather than say "sell," they stop coverage as if they never had anything to do with them in the first place.

Being your own investment psychologist isn't easy.

"It is a lot easier psychologically for people to sell winners than losers because they feel like a winner if the investment made gains and a loser if it didn't," said Mark Salzinger, chief investment officer with Salzinger Sheaff Brock LLC in Indianapolis.

This overlooks the fact that, from a tax standpoint, selling losses is advantageous but selling gains is not, he added.

"Emotions always run hot in times of greed and fear, but there's nothing wrong with taking gains on investments that you own," said Jim Lowell, editor of independent Fidelityinvestor.com in Needham, Mass. "On the other hand, there is also no reason on the planet to buy or sell based on the political policy or headline of the day."

There are, however, countless reasons to sell a stock or mutual fund.

Performance may have been disappointing or troubles significant with no end in sight. It may have become overpriced based on the yardstick used to determine its value. It may be too much like your other investments, and you wish to rebalance. You may disagree with current priorities or ethics. There may be better opportunities elsewhere due to changes in the economy or markets.

"Ideally when you buy a stock, you should jot down a few reasons for why you are buying it," said Nolte. "Then, when those reasons are no longer valid, it is time to sell that stock."

That could be as basic as saying that you will allow the stock to decline 10 percent and sell at that point, Nolte explained. You could also make the determination from a value perspective. If you bought a stock at a price that was 10 times its earnings, and it is now at 15 times earnings, it is probably a good time to sell, he said.

Don't put any investment out of mind. Too many people set up company 401(k) accounts, fund them and don't open a statement for years, said Nolte. Circumstances do change.

"Just look at the stock charts of McDonald's and IBM over a number of years," said Nolte. "You will see that while they've generally gone up, there have been periods when their stock has gone nowhere, and you'd have been better off selling and moving your money elsewhere."

If a big acquisition or financial problem threatens a company's dividend, that might be time to sell, advised Salzinger. In the case of technology, there are many companies that look attractively priced relative to their history, yet there is a fear they could be rendered obsolete by new technology.

"We have personal computers, but what if somewhere down the road PCs become obsolete because all PCs are on cell phones?" said Salzinger. "Some technology scenarios can take away a company's business."

Mutual funds differ from individual stocks, but require monitoring just the same. They can outlive their usefulness.

"In my business, I am always focused on the fund manager because we are buying the manager and not the fund," said Lowell. "If there is a manager change, that is an alarm bell for me, and I want to see that manager's prior track record because it may be a reason to sell."

When examining funds, Lowell monitors whether a fund is beating the stock index benchmark that it purports to follow. If an individual's portfolio has some funds that have either prospered or done quite poorly, thereby throwing the investor's overall diversification out of whack, it may be reason to sell.

Always pay attention to company news of the stocks you own. For example, Wal-Mart Stores Inc. recently renewed its plan to buy back as much as $15 billion of its shares, a buyback that replaces the $15 billion repurchase announced a year ago.

"Wal-Mart is broadcasting that it believes longer-term that its shares are undervalued," believes Lowell. "That bullish move signaling a down-the-road recovery is worth noting for investors."

 

Available at Amazon.com:

The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions

 

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