How long should you keep a stock?
3 months? 6 months? 5 years?
If you ask yourself these questions, keep reading, this is for you.
Holding stocks come with maintenance responsability.
Picking stocks is only half the journey, the hard part is maintaining those stocks in a portfolio.
And this is where we can lose money because portfolio maintenance requires a lot of time and attention.
We hear a lot about investing strategies but almost nothing for strategies to exit your stocks.
So which ones are they? And do you have one?
Calendar Rebalancing
Rebalancing is the act of buying and selling stocks in a porftolio to make sure that portfolio can deliver the results it was designed for.
Here we focus on the selling side to make sure we exit the stocks that need to be sold.
Many investors like to review their stocks once a year. And Financial advisors have an obligation to review the stocks of their clients at least once a year and make rebalancing decisions.
But is that enough?
If you hold a lot of stocks (maybe 30 or more) in your portfolio, then the annual review won’t do.
More like a quarterly review is necessary for rebalancing.
Big asset managers can hold hundreds of stocks in their active portfolios, therefore they would review and rebalance monthly, if not weekly.
But does it make sense to sell your stocks only when you reach a certain date?
Price Rebalancing
A better exit approach is to have a target performance for your stocks when you buy them.
One way is to sell 50% of your holding in a stock if that stock performance is 50% or more since you bought it.
If one of your stocks is falling by 20% or more and that stock is caught in an accounting scandal, don’t expect a rebound, it’s time to exit that stock ASAP without looking back.
An exit strategy based on stock performance might require a daily/weekly monitoring of your stocks. A lot of investment tools now can do this for you automatically.
Strategy Rebalancing
This exit strategy is quite rare but very interesting. It focus on short and medium term market anomalies.
Market anomalies are stock patterns that have repeatable performance that shouldn’t exist.
These stock patterns have a given lifespan with an expected performance that will simply disappear after a while.
What that means is that holding those stocks will have an expected performance for the next 3 months, 6 months, up to 1 year.
After that, that expected performance will be lost.
So the exit stragegy here will be to sell before the lifespan of a stock pattern ends.
So how often do you review your stocks and rebalance accordingly? And do you have an exit strategy?
If you don’t, we might have an exit strategy for your stocks.