INVESTING
Knowing When It's Time to Sell
Decision Center
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Ask the Experts
f you read personal finance magazines and watch television shows like "Wall Street Week," you can't be blamed for getting the idea that investing is a game and that the victors are those who outwit their opponents.
It's not true. The key to investing is so simple that it's mundane: discipline. Successful investors develop a discipline for buying securities or mutual funds and one for selling them. It's not you against them, it's you against yourself.
Is there a "sell discipline"?
When I interview mutual fund managers, I always ask them, "What is your sell discipline?" I want to know what conditions they have set for when they will sell a particular security. The good ones have ironclad rules.
For instance, they might set a value on a company and translate that into a stock price. They buy when the stock is selling considerably below that value. And they might sell when it reaches three- quarters of the value they've set for the company. The motto here is, "I'd rather sell a little early than stay too long."
Selling mutual funds is a bit different from selling individual stocks. That's chiefly because the fund is diversified among many different stocks. That diversification protects you from sharp swings in individual securities. Still, you must have your own "sell discipline," and you should have it in place before you buy your first fund.
Hopefully, before you bought a mutual fund, you checked to see that it had a consistent investment style, low expenses and consistent performance. You should also have checked the manager's track record. I believe a change in any of these things is a reason to sell.
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Sell when a portfolio manager leaves. A fund with a new portfolio manager is, in essence, a new fund. It has no track record. I sold Invesco Health Sciences when the manager was fired from that fund in 1994 for personal trading violations. Portfolio managers' changes can present opportunities. But when a manager leaves, sell.
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Sell stock funds when you're within three years of needing your money. Because of its volatility, the stock market is not a good place for short-term investments. If you need money for college tuition or the down payment on a house in three years, sell.
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Sell when a fund underperforms its peers for two to three years. You must be patient as an investor. But three years is a long time. For instance, I bought Pennsylvania Mutual Fund in 1990 because I wanted a small-company value fund. It lost nearly 12 percent that year. But it was a bad year for stocks and particularly small company stocks. I held on. For the next three years the returns were quite respectable in absolute terms 31.83 percent, 16.19 percent and 11.25 percent. But the fund lagged behind its small-company peers by a wide margin. By 1994, I decided it was not performing the role of a small-company value fund and I sold it.
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Sell when a fund departs from its investment style. This dictate is less clear-cut than the others. Many professional investors, such as financial planners, sell a fund as soon as the manager begins straying from his initial objective. So, for example, they will not use Mutual Discovery fund because manager Michael Price began investing in Europe rather than sticking with small-company stocks in the United States.
Other investors, such as Don Phillips, president of Morningstar, give their managers a little more freedom to go where the action is. There is nothing etched in stone about how you should decide. Still, you should have a policy on investment style and a way to determine when a fund crosses the line. You should also know when not to sell.
Never look back. People routinely admit that they check out how a fund they've sold is faring. Don't fall into that trap. Set up your discipline and stick to it. Don't second-guess yourself. Remember: Successful investing requires discipline. 
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Illustration by Terry Allen Copyright 1998 Microsoft Corporation