When Selling Stocks Isn't a Sin: Balancing Long-Term Holding and Strategic Sales

The oft-repeated advice to 'never sell stocks' has been widely misconstrued. While it might sound like sound advice, it's meant to emphasize the importance of long-term investment rather than a blanket prohibition against selling stocks. When taken literally, this advice can lead investors astray, as the purpose of holding stocks is not to hoard them without ever realizing any financial gain.

Understanding the Wisdom Behind the Advice

When professionals say, 'never sell stocks', they are referring to the wisdom of holding onto a solid performing stock over a long period. This advice also serves as a caution to those who frequently trade stocks, noting that trading is often not a fruitful strategy. If a company's share performance is strong over a long timeframe, e.g., twenty to thirty years, then it's indeed an achievement worth celebrating.

However, whether or not to sell stocks should be based on practical, long-term financial goals. For instance, if you have a mortgage to pay off or want to buy a holiday home, selling part of your holdings might be necessary. The remaining holdings can be passed on to loved ones, following the famous American investor Benjamin Franklin's adage, 'A fox might steal your money, but nobody can steal your reputation.' In wealthy situations, some investors choose to pledge their shareholdings to charity, ensuring a legacy of helping others and contributing to a fairer society.

Qualities of Stocks to Consider Before Selling

Consider the quality of the stocks you hold. Just as one would not take the advice to never sell a diamond and keep it in a drawer, selling quality stocks doesn't make sense. Quality stocks should be held onto for a long time before contemplating a sale. Stocks that pay rising dividends can provide compounding income, leading to yields on the original investment that might reach 5%, 10%, or even 25%—a significant return that can be leveraged to fund life's necessities or further investments.

Strategic Selling and its Benefits

Strategic selling, or selling stocks when appropriate, isn't about realizing gains or avoiding losses on the minor fluctuations of the market. It is about making rational decisions based on your financial needs and goals. If the stock's underlying company is doing well and shows no signs of imminent danger, there is no need to rush into selling.

However, selling can be a powerful tool when used strategically. For instance, if the company's performance starts to decline, or if the market is experiencing highly volatile conditions, a prudent investor may choose to sell the stocks before significant losses occur. Conversely, during periods of market stability, high yields, and strong fundamentals, selling stocks can provide the financial flexibility to invest in other opportunities or to reallocate investments according to changing needs.

It is also worth noting that holding onto poor-quality stocks can be a drain on your portfolio. If the underlying company is struggling, the decision to sell may not just be a matter of market timing, but a necessary strategy to protect your investment. Speculative stocks, known for their high risk and instability, are not suitable for long-term holding and should be avoided by all but the most adventurous investors.

Conclusion

Ultimately, the phrase 'never sell stocks' is a shorthand for the enduring wisdom of long-term investment and strategic selling. By keeping this in mind, you can make informed decisions about when to sell and when to hold, ensuring your investments continue to grow and serve your financial aspirations.