If you buy individual securities, are you sure you are holding on to the right stocks for the right reasons? Look through your portfolio and ask yourself why each stock is still there.
Granted, I am a fund buyer. I don’t buy individual stocks because I don’t like the risk involved. But that doesn’t mean I am against individual securities. If you do your homework and keep your eyes on the stock and the market (two different entities) you can do really well with individual positions.
Unfortunately, some investors hold on to some stocks for the wrong reasons. Here are the top 7 wrong reasons to hold a stock:
1. “I inherited it from my mother.”
I honestly respect the sentiment. If someone you love gifted you stock, it can be hard to cash it in. It might feel like you are betraying that person and that’s especially hard to do if they’ve passed on.
None the less, I urge you to reconsider. The real gift you got from this person was an investment that happens to be in the form of the stock shares you now hold. The person who gave you that gift worked hard to obtain those shares. He or she bought that stock because they thought it would grow in value. So what your loved ones wanted to give you was wealth and growth – not that individual stock.
The last thing your loved one would want would be to see you hold to an investment that no longer makes sense. Protect the spirit of the gift – not the shares.
2. “I don’t want to incur a taxable gain.”
I understand this also. Nobody likes to pay taxes. But sometimes paying taxes is a good thing. Which is better, paying tax on a gain or allowing a gain to turn into a loss? Obviously, it’s better to realize the gain (and pay the tax) than to sit and watch the gain disappear.
Of course since we can’t predict the future, there is no way to know if gains are going to expand or contract. But consider your risk profile. If you have a lot of your wealth tied up in one stock, you also have a great deal of risk. It can be smart to sell off a portion of that stock – even if it’s doing really well at the moment – pay the tax, and diversify your holdings.
Why? Glad you asked. If your wealth is concentrated in one stock and it continues to do well, your life probably won’t change. But if that one stock gets smacked, you might find yourself working at “Flippy Burger” supersizing it right and left – and not because you need something to do with your time.
Dividends are great. And dividends are often a major benefit of owning particular stocks. But lots of stocks pay dividends – not just the one you now own. You might be able to diversify your holdings and increase your dividend payments at the same time.
It also makes sense to consider the safety of the dividends and the stock price itself. Lots of investors bought MLPs and other high dividend paying stocks over the last several years and really got their heads handed to them.
If the company reduces or suspends the dividend, the stock price often craters (because the high dividend might be the only thing that is holding the share price up.) That’s what they call a “double whammy” in sophisticated investment jargon. Ouchy.
4. “I know it’s coming back. I can’t sell now. I don’t want to take a loss”.
I get it. When we sell a security for less than we paid for it, it’s like we admit that we made a mistake and did something wrong. It’s a shot to the ego.
Sometimes that message echoes loud inside our heads. But even so, this isn’t a voice you should listen to. You can’t predict investment results. You could have done all your homework and still bought a stock that lost money. It happens.
When you bought the stock you didn’t know it was going to go down in value. You can’t possibly know now that the share price is going to come back. Nobody knows what’s going to happen in the future. And by the way, if the shares do come back, couldn’t the prices of other securities also do well? You better believe it.
5. “It can’t go down any further.”
This is just a variation on the theme above. No Bueno. Tarot cards don’t work my dear Pilgrim.
6. “Everyone else is buying it.”
A couple years ago, everyone was nuts about Apple shares. From the height of the hysteria to its crash, investors lost about 60%. The stock has recovered of course but investors who bought the S&P 500 index fund did twice as well over the last 2 years as Apple shareholders.
I’m not saying Apple is a bad company. I’m just saying that crowd mentality isn’t a very good predictor of stock performance. Dig?
7. “I know this guy who knows a guy who says…….”
If you really have inside information and act on it, you will be breaking the law. If you get caught, you’ll go to jail. I can’t speak from personal experience and Al Capone might take issue with me, but in my book, all the money in the world isn’t worth getting thrown in the slammer.
And if you don’t have inside information then the information is public. That means the news is on the street and other investors know about it so you don’t have an edge. Bottom line? Trading on “special information” can be a recipe for disaster.
So, with all the wrong reasons to hold a stock, is there ever a good reason to continue to hold a stock?
The One Good Reason To Own A Stock
If you already own a stock and you’d buy it again today – right now – at the current price – and you’d be buying it for the right reasons. That is probably a stock that makes sense to have in your portfolio.
I’ve written an entire post on how to find stocks to buy and if that topic interests you, I recommend you review it.
My suggestion is to go through your portfolio now. Look at each one of your stocks and ask yourself why you still have it in your account. If you can’t come up with a good reason, it may be a good time to replace it with something more promising.
How often do you evaluate your stock holdings? How do you decide what to hold on to and what to sell?