Now that we've covered the buy guidelines for stocks that fit the value, growth, income and momentum investing styles, there are a few additional guidelines based on your allocation and management preferences. You will want to be aware of these as you create your own rules.
Turnover: These are set rules based on how often you want to trade and will be based on your individual investment management preferences you identified in Step 3: "I". When it comes to turnover, investors should be aware that:
- Value and income strategies will typically have lower levels of turnover
- Momentum and technical analysis strategies tend to lead to more trading activity
- You should opt for lower turnover approaches if taxes are a concern
Trading preferences:
- Small cap stocks have more potential upside but can be harder to trade quickly
- Large-cap stocks can be more easily bought and sold quickly at current prices
Personal preferences:
- Do you want to follow a sustainable investing strategy (e.g. ESG)?
- Are there values you want to incorporate? (e.g. religious preferences)
Although these will reduce the number of investment candidates, they may be important to you, which will make them necessary components to focus on when creating your individual buy/sell/hold rules.
Sell Guidelines for Stocks
Now it's time to get into the sell guidelines for stocks. We recommend that you use these to create your own sell rules for which stocks don't qualify for your portfolio any longer. We are big proponents of having and following written rules. We use written sell rules for our real-money model portfolios such as Shadow Stock, VMQ, and Dividend Investing portfolios.
- The stock no longer matches your strategy (e.g., value becomes expensive, sales decline instead of growing, etc.)
- A company stops being profitable
- The dividend is cut
- A negative change occurs in the business
- You purposely established a pre-defined stop price
Make sure you stick with your sell rules as best as you can. Making sure your buy, sell and hold rules for stocks are clear and concise will help you develop a successful portfolio that will help you fund your financial goals.
Participate
For this lesson, we challenge our members to compare their own sell rules with AAII's list. We want to hear what the differences are and how you will use these to select which stocks go in your portfolio.
For this activity, please review the attached checklist PDF and answer these two questions:
- In your own opinion, what is the most important rule to follow/create for knowing when to sell a stock that is in your portfolio?
- How can we reduce overall risk by sticking to a clear and concise sell plan when it comes to stocks?
Now, we want to hear about your experience and personal sell rules. Let us know in the comments below!
Download the "Selecting and Managing Your Investments" worksheet
Download the "Buy/Sell Rules for Stocks" checklist PDF
Questions about coursework, webinars, worksheets, etc.? Drop your inquiries in the discussion below. We're happy to help!
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Jenna Brashear
AAII Community Manager
Chicago, IL
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