Selling stocks that you've held for a long time, and done well from, is a testing issue. Here's how to address it.
Amid the little decisions we take without a second thought, an entire life can change course. Who hasn’t wondered, for example, how their life might have changed had they caught a different bus to the one in which their future partner was travelling? Economists have distilled these existential ponderings to produce something altogether more practical, calling it ‘opportunity cost’. It’s an estimate of the value of the next-best choice you give up when making a decision. In the world of investing, it’s especially useful when considering whether to sell one stock and buy another. Here, using a real-life example, we’re going to examine a sensible way to assess that question.
Subscribers frequently contact us, saying something along the lines of: ‘You told me not to hold too much of my portfolio in banks but I’ve owned 1,000 Commonwealth Bank (CBA) shares since the float. They’ve gone up 450% and my dividends deliver a yield on my initial investment of 34%. And you think I should sell. Are you crazy?
The concept of opportunity cost is an excellent way of addressing this issue (selling CBA shares, not our craziness). Let’s start with the capital gains and the yield figures. Based on the initial investment, these numbers are indisputable facts. But to count them both is a mistake. The stock may have risen to $29.69, but if you count that as your wealth, your annual yield is 6.2% (the dividend per share—$1.83—divided by the current share price, not the one at which you purchased). That’s healthy, but it’s not 34%. Still sceptical? Let’s now have a look at what happens when, one day, you sell your CBA shares and look at another opportunity.
To read more of this article regarding
Australian shares, visit The Intelligent Investor at
www.intelligentinvestor.com.au.
