When to buy and sell stocks?

A couple in their early 40s asked me this common and yet important question. They stated that I would always provide them with boring advice and would ask them not to fiddle too much with their already balanced portfolio.

So, the question is have you always wondered when you should add a new company to your existing portfolio or when should I sell an existing stock from the current holding? The more important question is how should one judge the overall portfolio performance. Some parameters that you may generally consider are is the share price the best way to judge your portfolio? 

Most people do not appreciate adding more units of shares you have already bought in your kitty. Why so? 

The answer is quite obvious: It does not excite us. We think that buying something new or an exotic stock will prove to be more fruitful for us. But wait, have you ever thought that you are more likely to be well aware of the companies you already own, it is often a great use of funds to add to them. A good time to add is when there has been an improvement in profits or prospects of the company but the market has not recognized it yet.

Adding a new company 

Remember, there will always be a buying opportunity that can come up when the overall market is on a downward spiral (the bearish phase); when some sectors see a drop /or when some companies become attractive either in valuation terms or prospects or both. What should you do?

You should judge the new company against what you have already bought earlier, as that is the benchmark to beat. Compare the future growth prospects of this new company with that of your overall portfolio. If the new company is not better than what you already own, then it is not going to improve the performance of your overall portfolio. So, you should not consider buying it.

But, just in case this new company will improve your portfolio, then don’t try to time the market. Remember that a great business at a fair price is superior to a fair business at a great price.

Selling an existing company

Now, let’s come to selling an existing company. If a company is becoming weaker and is weakening your overall portfolio, then you should get rid of it. However, it would be best if you did not sell at the very first sign of trouble. Every company goes through its tough times and economic cycle. On the other hand, if you spot a better investment opportunity, you can consider selling the existing one.

Nevertheless, the only way you will be able to make the right call is by keeping track of the company after you have bought it. These are subjective decisions and you may not have all the information.

Don’t fall for this as I have usually come across so many investors who say let’s wait for the price to recover at least my purchase price. Remember, it will only delay the inevitable. Don’t do that.

How to judge your portfolio’s performance?

Only considering the share price movement is not the right approach. It has its weaknesses. In the short term, several factors lead to the fluctuation in the share price. So, simply following the share price can prove to be a quite costly affair for you. You might end up making a poor bad decision.

Now, you will ask what should be your approach. Use the operating performance or check the fundamentals of the company in the portfolio. This would give you a better perspective of reality than short-term price movements. However, price is important in the long term. Good performance almost always gets reflected in the share price movement in the long-term perspective.

Also, see your portfolio’s overall performance rather than that of individual outperformers and underperformers. Any portfolio will have those but what matters more is the aggregate return and not only the outliers.