As much as you may be a buy and hold investor, there are times when you need to take your profits and move on. In some cases, it’s taking your losses. I don’t believe in the concept of not reviewing your investment regularly, even if you are a buy and hold investor. Reviewing your investments regularly is very important as it allows you to see trends and make decisions at the appropriate time.
As a dividend investor, reviewing your investment as least once per quarter is important to identify the possible changes in dividend payment or dividend payout ratio to name a few.
When To Take Your Profits
A Better Opportunity
As you monitor your investments, I assume you also monitor your watch list. In which case, you may have an opportunity knocking without the funds available. Unless you are in the habit of just having money around to invest but that’s not my case, I like to have my money work for me.
As a dividend investor, the current yield is a good indicator of the current performance and can be used to compare with another investment. Assuming you would be happy to hold either investment, the highest yield investment may be your choice.
It may also be that your current investment had a really good run in stock appreciation whereas a potential investment is still lagging behind. In can be greed through and considered market timing.
Need to Diversify
In some cases, your profit has increased your holdings in a sector by so much that you are exposing your portfolio to greater risks. The need to diversify and reduce your holdings may require you to take some profits but it doesn’t have to be all. Back in March, I did just that when my portfolio became overweight in the energy sector with my Crescent Point EnergyTSE:CPG holding.
Price Target Reached
A friend of mine follows price targets by analysts and uses it in his investment analysis and it seems to work for him. When a company reaches the target price, especially when it does so quickly, he will tend to take his profits.
Opportunity To Reduce Taxes
This one requires a loss :( Sometimes that’s just life but when it happens, you may be able to use it to offset taxes from your current profits. (From a Canadian tax perspective that is.) The rule, however, prevents you from buying the same investment for 30 days which may not allow you to buy back your investment at the same price. In which case, a backup plan with other investments is recommended.
When To Take Your Losses
This option tends to hurt your ego :) However, there is a time when enough is enough and you need to take your losses.
Change In Direction
Take Yellow Pages TSE:YLO or Shaw Communications TSE:SJR.B for example, the companies appear to be undergoing a change in direction which is affecting their stock price. Yellow Pages has been decimated since they converted to a corporation and Shaw has had some difficulty with competitor Telus and it is slowing its expansion in the wireless. Investor confidence is greatly reduced and it may be that you have a better opportunity to focus your funds on.
As a dividend investor, a reduction in dividend payment is never what you want to see. It’s probably not an automatic sell, but it signals trouble and requires a deeper look. In most cases, every attempt at retaining the dividends failed though and it may just be that you will sell since other investors will probably flee and it will drive the price down.
In some cases, you just have to cut your losers. Take Manulife TSE:MFCNYSE:MFC for example, it has been hurt during the financial crisis and it continues to hurt. They have policies in the US for which they want to double the rates because it’s a loss to them. The hits continue to keep on coming … If you were holding it prior to the crisis, do you average down? or do you cut your loses? Remember that the dividends were cut… It should have been a sign to dig deep.
Having a strategy to decide on when to sell (for whatever reason it may be) is important and it cannot be ignored. In either case, I have not mentioned the scenario where you simply need to sell because you need the money or for retirement purposes.