ASK SMARTMONEY: To Sell Or Not To Sell
Dow Jones Newswires
July 21, 2000
QUESTION: When is the proper time to sell a stock? I've been trading for some time, but would still consider myself rather green. I've just graduated from college and have begun to work and have also received some capital from an inheritance. Being young and having many working years ahead of me, I'm comfortable dealing in higher risk (stocks like Rambus (RMBS), Cisco Systems (CSCO), Veritas (VRTS)). How can I best determine a target price, and at what time do I sell to keep the price within that target's zone?
- Forrest Visoon
ANSWER: Trying to precisely time the market - or even a single stock - can be a fool's game. Even the experts fail. That's why we recommend a more studied, long-term approach. As a "green" investor, you could start by reading our stories "The SmartMoney Approach" (http://university.smartmoney.com/departments/strategicinvesting/stockpickin g/index.cfm?story=intro) and "Value vs. Growth." (http://university.smartmoney.com/departments/strategicinvesting/stockpickin g/index.cfm?story=valuevsgrowth) You might also want to study the more storied investing styles, like Warren Buffet's or Peter Lynch's, to get a sense of which best fits you, advises Stephen Barnes, a certified financial planner from Barnes Investment Advisory in Phoenix. And, until you get your investing legs, consider relying on mutual funds to do at least part of your stock picking.
Having said all that, there are ways to gauge a stock's worth, and signs you should watch for that can suggest it's time to sell.
The most time-honored method of valuing a stock is by looking at how much it costs relative to its earnings (its price-to-earnings ratio, or P/E). Or, for growth investors, its expected earnings growth (the price-to-earnings-growth ratio or PEG). Then, compare your stock's ratios with those of other stocks in the same industry, and to its own over time. For more on how to use these ratios, turn to our stock-investing sections in SmartMoney University (http://university.smartmoney.com/) , paying special attention to our stories, "How Much Is This Stock Worth?" (http://university.smartmoney.com/departments/investing101/stocks/index.cfm? story=howmuch) and the "Digging Into the Numbers" (http://university.smartmoney.com/departments/strategicinvesting/stockpickin g/index.cfm?story=digging) series. After that, it's up to you to do your homework - reading annual and quarterly reports for any company you're interested in, as well as the news and analysts' reports - to spot other factors that could influence the stock's value.
While we advise a buy-and-hold approach, in part to reduce capital-gains taxes and brokerage fees, there will of course be times when you want to sell. How do you know when it's the right time? If the company is no longer growing at the rate you expected, that's a bad sign. Or, if the market for its product shrivels, Barnes says you should jump ship. On the upside, if the company's price sails above what you think it's worth, lock in those profits. Then too, you might simply spot a more attractive stock and need some cash to pursue it. Again, getting the timing exactly right is problematic, as our story, "The Stock Market Chamber of Horrors" (http://university.smartmoney.com/departments/investing101/riskvsreward/inde x.cfm?story=waiting) illustrates.
Regardless of which investing style you deem appropriate, begin with an asset-allocation plan. Diversification is one of the keys to successful investing, says Cynthia Conger, a certified financial planner in Little Rock, Ark. With a diversified portfolio, if all your small-cap technology stocks plummet in a market upheaval, your entire savings won't be flattened. For help in this area, turn to our SmartMoney One Asset Allocation System (http://www.smartmoney.com/si/tools/oneasset/).
For more information and analysis of companies and mutual funds, visit SmartMoney.com at smartmoney.com |
