Making Cents: 'The right time to sell shares'

Financial advice with Liam Croke

Liam Croke

Reporter:

Liam Croke

Email:

liam@harmonics.ie

Making Cents: 'The right time to sell shares' - Liam Croke

I advised a client of mine to buy stock in a particular company back in March for $77.18 per share and now they’re valued at $294.23.

He bought €10,000 worth of shares in this company, and now they’re worth €38,120, so he’s done very well. He called me last week, and asked, is now the time to sell?

Should he take the profit and walk away, or is there more money to be made by holding on to them?

And it’s a tough one to answer, because there are so many variables to consider.

But there must be some indicators, that can help determine when to sell, and there is, and I’ll share with you, what I think they are shortly, but before I do, there are some age old adages when it comes to selling shares, that shouldn’t be ignored either, and they have got to do with the time of the year.

Sell in May and go away is one term associated with market trading, and its logic refers to the belief that stocks show weaker performance during the months of May to October. Stronger performance occurs during November to April. So, sell in the spring, just before the summer lull and buy again in autumn, just before their value increases again.

This is sometimes referred to as the Halloween indicator.

There’s also some research which suggests that selling at the end of January might be a good time, because historically stock values increase during the first month of the year, and in investment circles, this is known as the January effect. A similar boost in share values can occur in December, which is known as the Santa Claus rally, where a boost in share values is linked to holiday season optimism and it’s also when end of year bonuses are paid.

So, if you don’t want to do a deep dive on a companies’ price to earning ratio, dividend yield, earnings per share etc. perhaps just knowing what time of the year is historically the most advantageous to sell, is useful to know.

And I think being mindful of seasonality is interesting but paying closer attention to concrete evidence is important as well, of course it is.

If you want to do this, you need to look at things like a companies’ dividend yield, its price to earnings ratio, its earnings per share, its dividend pay-out ratios, its debt to equity ratio and so on. You’ll get this information by monitoring the monthly and quarterly performance of the companies you hold stock with. And any of these key metrics are easy to find, just Google the company you have stock with, and there are multiple sources like finance.yahoo.com who will give you all the data I’ve just referred to.

Other indicators you need to be mindful of, and on the watch out for, is when a dividend payment is cut or withdrawn, or if a company is trading at lower volumes than before or what’s considered normal.

If monitoring these metrics doesn’t particularly interest you, and you are looking for simpler methods, then you should consider the 8 Week Hold Rule.

What this rule is referring to, is if a stock has increased in value by 20% from a normal market functioning base, and does so over a three week period, it could have what it takes to become a huge market winner. And if this happens, the advice is to hold the stock for at least eight weeks before you sell it.

The eight week rule is to help you sit tight and not react too quickly to its jump in value. It’s likely some investors will take their profits off the table too quickly too early, which causes the stock to contract somewhat, but holding for eight weeks will help you avoid that rush to cash in your chips too early, when the stock, if held, could go on to make even further gains.

Once the eight weeks have passed, you can then decide if you want to sell and lock in your gains or you may decide to continue to hold, because you want to see how things might play out.

And if you have no reason to sell, why sell a winning stock? You might like the company, you like what it does, you like their product, you could even work for them, so if you don’t have any reason to sell and you’re thinking of holding on to them for the long term, that’s fine as well.

However, if you have a reason and more importantly a specific timeline and purpose for the stock once sold, then setting a target price to sell it once it reaches a particular price is critical.

If, for example you’ve been saving into an employee share purchase plan, specifically for the purpose of accumulating funds that will be used towards a deposit for a house purchase, and if you’re 12 months away from buying a property, and have secured your deposit from what you’ve accumulated in an ESPP scheme along with other monies you may have, any adverse impact on the share price could delay your purchase and are you willing to accept that risk?

If you ran a scenario, that showed if the companies share value dropped by 10%, it would, hurt a little, but you’d still be able to buy in 12 months’ time. And, if it increased by 10%, then great, you’d have extra money that could be used to buy more furniture, or it would help towards your legal bill.

So, in this instance a move in the share price of 10% either way, isn’t going to be a game changer.

If, however the share price dropped by 30%, because of the fallout from Covid-19 or you’re unsure what the consequences C19 will have on the share price in the medium term, because that outcome won’t become evident for at least another year, then you need to be careful.

If that outcome is not good and it means it will set your house purchase back by 12 or 18 months’ then maybe it’s a gamble, you’re just not willing to take, because the downside far outweighs the upside.

The decision to sell in instances like this, is an easy one.

So, having a specific purpose will influence your timing, damn right it will.

Whenever anyone asks me when, is the right time to sell shares, just like that client I referred to at the start of this article did, my answer is, there’s no bullet proof strategy that can tell you when the right time is.

You can review very technical data, you can sell just because of the time of the year, you can sell because you’re looking at trends of what people are buying and don’t see a long term future for the product your currently investing in.

My advice is always to set yourself your walk away price from a particular stock i.e. what’s the trigger number that if it reaches a particular high or low, you’re going to sell. Your essentially asking yourself how much you’re willing to lose, and what profit level your happy to accept.

By doing this, you become more disciplined and you’re taking some emotion out of your decision making process, and that’s important.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey, Co. Limerick. He can be contacted at liam@harmonics.ie or www.harmonics.ie