There is absolutely no way that I’m going to sit here and claim that all the stock choices I’ve made have proven to be big winners. Underperforming stocks, or dud stocks, require careful consideration before selling, especially if you have to pay commission fees!
Let’s go through a four-step process on how to get rid of duds and where to invest next.
Analyze and evaluate
Investors will want to first look at why the stock dud performed as it did. This will be through various avenues, so it’s important to look at them all. This could help identify what went wrong and if the company could rebound or not.
First off, look at the company’s financial ratios. Compare the stock’s price to earnings, its debt to equity, and return on equity. This will help identify how the company is performing compared to its earnings, if it can cover its debts, and how it’s using investor money to generate profit.
Look at the company more broadly. How have earnings been over the last few quarters? Does it provide a strong outlook? And what is the competitive landscape like? Furthermore, what kind of news has come out about the company that could further hurt the stock?
A great way to look at this is, of course, through the internet, but try finding analyst reports as well. Then, there will be other items on a macro level, such as economic sentiment — both broadly but also on a sector level. So, consider all this before deciding on whether it’s worth it to sell.
Prioritize
Now that you’ve identified which stocks could provide you with growth in the future and which truly are underperforming, investors need to consider their own goals. You’ll need to make informed decisions for the future of your investments. And that will mean identifying your goals, values, and long-term benefits.
For instance, start with a clear goal in mind. What is the purpose of your investments, and at what price point are you willing to take it all out? You could be putting a pool in the backyard or simply investing for retirement. Either way, you’ll have a goal in mind.
Then, talk to trusted individuals, such as financial advisors, who can help you reach those goals and identify which stocks you have that may be working against you. Then, do some research based on multiple avenues of future growth opportunities. Whether it’s sectors, assets, or fixed income, it all should help you work towards your goal.
Then, prioritize long-term benefits. Delay gratification. Stop focusing on that one guy who made a killing by buying a stock way back when. He likely also has some stock duds weighing him down. Instead, think critically to help you make future decisions.
Get the right platform
One area where investors may be unwilling to sell is because their investing platform costs too much to trade. There are a few ways around this. One is through discount brokerages, with most Canadian banks offering self-directed Tax-Free Savings Accounts (TFSA) where you can buy and trade.
Then, look at the research tools, investment options, features, customer service, and fees. One bank might offer a $10 commission fee, and the other $5. Some might be free! Furthermore, I know for myself I can use reward points from my credit card to pay fees. This all can help to make sure you don’t lose too much from your trade.
Sell and buy
It’s best to look at your investments as a whole, not just down to one stock. If you’ve hit a goal thanks to other investments, it might be time to get rid of those stocks weighing you down. Then, you can move forward with stronger investments, such as an exchange-traded fund (ETF).
A strong ETF to consider right now would be Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY). This ETF tracks the Financial Times Stock Exchange (FTSE) Canada High Dividend Yield Index. It exposes you to over 47 high-yielding Canadian companies, with a trailing yield of 4.65% as of writing. Furthermore, shares are up 11% in the last three months alone! Now, you can rest easy knowing your duds aren’t weighing you down.
