Rather than “buy and hold,” we think it’s a good idea to invest in stocks and then “buy and watch closely.” That helps answer one important question we frequently get from investors: How often should they sell investments they own and buy new ones?

Our answer never varies. Do it as rarely as possible. That’s because turnover in your portfolio cuts into your profits.

When you are trading stocks, you face three costs every time you buy and sell:

1. Brokerage commissions: Every transaction you make in your portfolio involves brokerage commissions or similar costs, even if these costs are hidden or built into the price you pay or receive.
2. Losses to the bid/ask spread: If you want to carry out a transaction right away, you have to accept the highest available “bid,” or pay the lowest “offer.” You can enter your own bid or offer. But this means you have to wait for another investor who is willing to do business at your price. Meanwhile, prices could move against you.
3. Taxes: If you sell at a profit in your taxable account (outside your RRSP or tax-free savings account), you usually have to pay capital gains taxes.

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Turnover rate for successful investors—less than 25%

You can measure your portfolio turnover to see how trading is affecting your results. Add up the value of all the investments you bought during the year and all the investments you sold. Next, add the beginning and year-end values of your investment portfolio. Divide the first number by the second.

For example, say you sold $24,000 of investments in 2011. You held on to $4,000 to pay capital-gains taxes, and bought $20,000 of investments. That’s a total of $44,000. Your portfolio is worth $55,000 at the beginning of the year and $62,000 at year’s end, for a total of $117,000.

Now divide $44,000 by $117,000. The result: 37.6%. That means you replaced an average of 37.6% of your portfolio in 2010. That’s on the high side. Many successful investors have portfolio turnover of 25% or less a year—often much less.

It pays to seek out stocks that you believe you will be prepared to hold on to indefinitely. You’ll change your mind on some of them, of course. But you’ll hold others for decades, and these stocks will give you your biggest profits.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Have you changed your approach to selling stocks because you felt that in the past you sold stocks too soon or waited too long to sell? Do you trade stocks less frequently than you did during the earlier stages of your investing career? Let us know what you think.