Number Five Rule for Selling an Investment.
It always pays to review and remember your sell rules. Here are the first four that I have covered in previous blog posts. These rules can spare much agony and reduce losses when consistently applied.
Rule 5 is related to Rule 4. The issue is related to divestitures. “If a company announces plans to split itself or spin off a separate company, then I am a bit skeptical.” The question to ask is “why are they selling?” If they acquired a business and are now selling it, I want to know who decided to buy it in the first place. Did a new management team look at the total business and do they have a plan for how to grow the remaining business? Are margins slipping? Is the company losing market share? How does this benefit the shareholders?
I won’t sell my shares of a good business like Apple, Target or some other growing business with growing dividends. Target, for example, sold its Canada-based stores due to lack of demand. But sometimes a divestiture is a sign of poor leadership.
There is a sense where this rule also applies to ETFs. One of the things I want to see in an ETF is a relatively low turnover ratio. For example, ETF VYM (Vanguard High Dividend Yield Index Fund ETF Shares) has a low 7.0% turnover ratio. This means the ETF managers are not spending a lot of time buying new companies or selling existing ones. They are, in effect, not chasing the next great idea that might be a poor idea.
Here are some good Investopedia links regarding divestitures: