Here is the problem. You bought a stock countless years ago that is now worth 10 times what you paid for it, but in the last 5 years its listing price seems to be super glued to the wall. He has always been a “buy and hold” advocate and this action seems to confirm the wisdom of that strategy. But now he’s not sure, maybe it’s time to move on to something else.
The question that keeps being asked is the same question that thousands of people have asked before: when do I know this power plant has run out of gas and is it time to sell it?
Here’s some help with both sides of the coin:
1. “Buy and hold” does not mean “until death do us part.” Every investment strategy has three basic components: buying, holding, and selling. Obviously its buy and hold components worked well. The stock was a good choice and has risen significantly in value despite what was likely some volatility along the way. It appears that you have reached the “growth” phase of security. With the lackluster performance of the past few years, the stock may have matured and will simply not repeat its previous performance. As Paul Simon would say: “It’s time to sell, Nell.”
2. Is there a high enough dividend yield to support retention of value? Calculate your dividend yield based on your original purchase price. If it is 5% or more, it is not a bad annual return for a quality security with some potential for future appreciation. A company that has a history of dividend increases is one more reason not to sell.
3. You know that if the trading price does not move up, the bragging rights of your average annual return decrease. If you’ve been up 200% in a stock for 5 years, bragging about an average annual return of 40% is a good story. If it is still above 200% in 10 years, it is very likely that someone has a better story.
4. Anything that overheats needs a cool down period. After a prolonged rally, a stock’s weekly closing price will sometimes be within a few percentage points in below-average volume. Based on technical analysis, if this continues over a period of time, the stock could simply be forming a new base price. With an increase in volume, the stock can “break out” and continue to rise. In the event that the stock price falls (especially on late stage foundations), there is a danger signal as this could mean that institutional money has drifted away from the stocks.
5. No matter how much you want to, you cannot change companies. Changes in the company’s fundamentals, management, and business strategy can affect the price of a stock. Sometimes it is a change for the better, sometimes not. You must realize that nothing you can do will alter this change. Sentimentality doesn’t have much room in the stock market. If the fundamentals are not what they used to be, then it is. Look at yourself in the mirror.
6. Tell the truth: is this really the capital gains tax? We all like to play psychological games with ourselves, so don’t be ashamed to admit it. When you add up your net worth on paper, it seems higher before taxes than after taxes, right? Unless you are planning to die with all your winnings on paper to receive the “step forward” in the base, recognize the difference between a game and reality.
If you don’t know whether to keep or sell, take the time to explore your options and decide which path is best. Indecision will get you nowhere.
