Much the same holds true when it comes to equities. Nathan Snyder, director of equity investments for Parker/Hunter Inc., says that employing a rational sell strategy is every bit as critical to portfolio success as is buying the right stocks at the right price.
The emphasis on the buy side, says Snyder, is the result of the way in which stocks are sold. The process of trading stocks is driven mainly by brokers, who are prospecting for clients who might be interested in buying stocks -- not for those who have an equity that the potential client might be in the market to sell.
One psychological barrier to selling that isn't in play when buying a stock is that selling can trigger tax consequences if the seller makes a gain.
Complicating the process is what Snyder terms "get-evenitis," a tendency to hang on to a stock that has dropped in value in the hope that it will recover. But Snyder says this strategy is flawed.
"That ignores the fact that a stock that falls 50 percent has to go up 100 percent just to get even," Snyder says.
To bring some discipline to the decision, Snyder recommends employing a method of evaluating a stock that recognizes flags that might indicate that it's time to sell.
Parker/Hunter applies a quantitative approach to determining if a stock should be sold. Its process looks at valuation, operating efficiency, balance sheet stability, earnings integrity and signals from management that there may be structural or operational weaknesses in the company.
Finding weakness in one or more of the measures is the first warning to take a closer look at the company to see if there are further indications that its stock may be on the downturn. Snyder can go to the company and analyze the other metrics or information that might support a recommendation to sell the stock.
"It gives the first nod to go back to that stock and consider selling it," says Snyder.
Ultimately, good investing requires making sound decisions at both ends of the buy-sell continuum.
Says Snyder: "Timing of investments is the most important component in portfolio building." How to reach: Parker/Hunter, www.parkerhunter.com