What you need to consider before selling shares

There's an expression that 'markets climb up mountains but fall off cliffs' which I love, as it reflects the long term graphs of share markets - a gradual rise in the markets then every few years (sometimes longer) a really sudden drop, before the market continues its climb again, and always reaching new highs.

These drops might not look like much on the charts, but for those who lived through them - the beginning of COVID, the global financial crisis (GFC) and even going back to the dot-com bubble of 2000 - they were unforgettable.

These significant falls of 30% and more really tested the patience of investors, causing great panic.

In many cases, investors would cash in, often close to the very bottom, and realise their losses - never to recover all that they would have, had they simply done nothing at all.

This is not a recommendation to buy and hold forever. There will be times when it makes good sense to sell an overvalued share.

But trying to work out the best possible time to buy a cheap stock and sell an overpriced one is virtually impossible.

For example, CBA is currently the most expensive bank in the world.

It trades on a multiple of over 26 time earnings, when banks normally trade about 12-13 times earnings. It can be very easily argued that the current share price is double the price it should be trading on.

But CBA first became "expensive" when it hit $120 in April last year, which was about 30% above the median target price of the analysts who cover CBA. Any investor who sold all of their CBA shares when it reached that level would have missed a further 33% upside, with the share price now over $160.

Similarly, the large cap US share market became expensive a few years ago.

The mostly tech-driven stocks have valuations that reflect high levels of growth for many years to come.

The reality is, these very large companies will not be able to sustain the growth rates that got them to mega size.

However, investors that didn't have exposure to these US tech companies over the past two years would have missed two 20% plus years in a row - something that doesn't come along very often!

I often think that the sell decision is harder than the buy decision, but often a slow sell-down works much better than a complete exit.

While it is almost impossible to get the timing perfect when selling shares, it is equally difficult to get the timing right on buying.

Investors will never be able to perfectly time buying in at the bottom of the market. A 20% fall does not automatically mean that the worst is over, as those three large corrections mentioned earlier were far worse than a 20% fall.

But even if the market has further to fall, it can be worth weathering this in order to be exposed to the next rise.

Every crisis has been followed by the sharemarket reaching a new high, so moving quickly and buying into a market after a large correction will, more often than not, result in a better financial return than moving more slowly and waiting until the share market has already bounced back up 20% before buying again.

Even using a "dollar cost averaging" approach to buy back in could result in missing out on returns.

Everyone has different financial needs and goals, and investments should always reflect an individual's personal situation. But there are times when investors will need to act, even if it seems to be going against the herd.

When we think a share has become overvalued and expensive, selling it slowly can be the right approach, and when the market or a share becomes cheap, often moving with greater speed can also be right.

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