As investors, we tend to focus quite a bit on when we should buy something. It’s important to make sure that you get a good deal on a security, and that you are choosing something that has good potential and possible staying power.
Even if you subscribe to the idea of buy and hold, though, it’s also important to know when to sell as stock. In fact, knowing when to sell can be vital to your success as an investor. It can mean cutting losses — and it can also mean locking in profits.
First: Never Sell in a Panic
You should never sell a stock because you are ruled by fear. The decision to sell a stock should be made only after careful consideration. Just because the market is tanking and everyone else is selling is no reason to sell. In fact, it’s one of the worst reasons to sell. Before you sell, take a deep breath and figure out why you want to sell. Then, consider some more rational reasons why you might sell.
Look at the Fundamentals
One of the first things you want to do is look at the fundamentals of a stock. You don’t want to sell just because the market is going through a rough patch. If you bought a stock when it was a good value, you want to make sure that it has ceased being a good value before you sell.
If the fundamentals of the stock have changed for the worse, that’s when you should consider selling. You don’t want to get caught up in a selling panic. That’s how you sell low. Instead, check the fundamentals. If nothing has changed, there is a good chance that the stock will recover when the current downturn is over — and it might even outperform.
Consider Your Long-Term Investing Goals
You should also consider your long-term investing goals, and the purposes for your portfolio. Does your portfolio still match your goals? You should also consider your asset allocation. As you approach retirement, or if you are getting close to another financial goal, you might be interested in changing things up a little bit.
If your portfolio is no longer in line with where you are at in your life, selling some stocks, and buying others, or changing your asset allocation, might be one way to make sure you get back on track.
You Want to Take Profits for Some Reason
Another consideration is whether you want to take profits for some reason. More active traders learn quickly that it’s a good idea to take profits at a certain level. Make a target level, and when the stock reaches that point, sell it. While it can be tempting to run your profits, you also risk losing everything have. Consider a level that you think is reasonable, and sell when you have profits to take.
If you think that a stock is in a bubble that is likely to burst soon, and you have had a good run, it’s probably a good time to sell. Trying to squeeze a couple hundred extra dollars trying to time the market might not be worth losing just about everything you had gained on that stock.
You Need to Stop Losses
At some point it becomes apparent that you have a loser. We all choose losing stocks from time to time. It’s important to know when to sell, though, and cut your losses. A good plan can be to set a stop loss trigger, and sell when an investment loses so much of its value, or reaches a certain price. Just make sure that your stop loss is at a level that allows you to determine that something really has changed with the stock, and that you aren’t panicking with the market.
Knowing when to sell is an important part of investing. If you want a winning portfolio, you need to consider when a stock no longer fits your needs, and when it makes sense to cut it loose. There are lots of legitimate reasons to sell. And, as long as you make a reasoned decision, rather than basing it on fear, you are likely to have success in the long run.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.