One of the most perplexing issues for many investors is the question, "When should I be selling?" The best answer that I can come up with, after doing this for the last 30 years, is "Well, it depends."
I know that sounds like a cop out, but in reality, there are as many reasons to sell as there are reasons to continue holding a particular stock.
This is a question that I personally wrestle with all the time. My inclination, based on my own experience with mutual funds is to sell, in order to lock in profits. Nothing made me more crazy than knowing that at one point in time, my portfolio was worth "X" and after a market correction, that value has eroded and I find myself with a portfolio that is worth 10-20% less than it was once worth.
But, as a long time and long-term investor, the discoveries that I've made with my investments is that there really aren't a lot of reasons for investors to be selling their positions. As a Dividend Growth investor, the primary goal of my investing strategy is to create an income stream that grows every year and does so at a rate that is faster than inflation. That is accomplished by purchasing stock in companies that have raised dividends for a long period of time and that have raised those same dividends on an annual basis over that same period of time.
The notion of capital gains is secondary in the DG investment strategy. What most DG investors discover, however, is that over time, the value of their stock purchases do rise in value, and one important metric might be how my portfolio value is holding up relative to the amount of money that I've invested.
For the purposes of illustration, I am going to use the portfolio that I created for my mother a few years ago. The portfolio was created by taking money from CD investments, as they matured, and investing that money into a basket of dividend paying stocks. The results speak very well to this question of "selling" vs. "holding."
What You Should Know
The Perfect Investment Portfolio currently consists of 15 dividend paying stocks. Here is an updated report for the portfolio, as of the market close on 8/20/2012.
As you can see, as we moved forward in time, the relative weighting of the individual holdings in the portfolio have changed. Altria (MO) for example is currently 10.82% of our holdings, but the company is currently yielding 4.66% and has a yield on cost of 8.44%.
Johnson & Johnson (JNJ) represents 7.01% of the total portfolio and is currently yielding 3.6% and has a yield on cost of 4.22%.
Here is a table that shows the yield on cost for each position as well as the current yield based on the closing prices on Monday.
What I Know
This portfolio started out with $300k invested. It is now "worth" $418k, which is a very nice appreciation. At this particular point in time, the options are many.
1. I could sell the entire portfolio and pocket a gain of $118k, park that money on the sidelines and wait for a major correction and start this process all over again.
2. I could rebalance the portfolio by taking the 15 positions that I own and sell some positions and purchase others so that each position ends up as an equal percentage with each of the other stocks.
3. I could sell off my winners and take that money and redeploy it to the stocks that haven't performed as well. I wouldn't be balanced, but I would be buying shares in companies that perhaps the market has not come to love yet.
4. I could take profits from some of the better performing stocks in the portfolio and use that money to purchase additional companies that interest me and would add to the overall income stream that the portfolio could generate with say a few MLPs or REITs thrown in the mix.
5. I could do absolutely nothing. Now, I know that doing nothing has a way of making people crazy. But, the reality is that I still love each of these companies. They meet my criteria as a DG investor and they are increasing dividends (as a group) at a rate faster than inflation.
As I've discussed in the past, I believe that every investor needs to have a goal for his/her portfolio. Why are you investing and what do you want to accomplish.
Once you have determined that goal, the next step in the process is to consider how you plan on achieving your goals. Achieving your goals might be best accomplished by holding on to your stock positions long term. It may be best served by trading in and out of stocks on a more regular basis.
Summary and Conclusion
For me, I am a DG investor first and foremost. I believe in creating a group of stocks that become a "core" for the portfolio. For me, that "core" group must:
1. Be DG stocks. That is, stock in companies that have paid dividends for a minimum of 5 years.
2. These core stocks must be increasing those dividends on an annual basis, with a growth rate that is exceeding inflation (where possible).
3. These stocks must have the ability to continue increasing those dividends into the future, with increasing earnings and profitability.
4. Once the core group has been created, then it is time to seek out appropriate additions. For me, that included REITs, MLPs, and undervalued companies that represent a potential opportunity for capital appreciation. The sky is the limit, once the core group has been created.
5. As for selling the stocks in the core group? The only time I do that is when the companies in the core no longer meet the criteria to remain in the core.
6. While your views may be different, these have served me well and I hope that you will consider them for your own portfolio.