Do you know when to sell your stock?
It would be great if you could buy a stock, bond, mutual fund, or exchange traded fund and just hold it forever. Sadly, this is not the case. With every investment, there will always come a time when you have to sell shares of stock.
But how do you know when is the right time to sell stocks or to stop adding to a position? Finding the right time to sell your investment can be tricky.
Let’s take a look at three signs that will tell it’s time to dump your shares.
1. Sell your investment when it the price gets too high.
You should never sell an investment (stock, mutual fund, ETF) just because the stock market is up. You should, however, sell an investment when you think the price has gotten too high.
There is no reason to continue buying into a mutual fund or a stock if you think that the investment is overvalued. Signs that an investment may be overrated are an extremely high P/E valuation, numerous analyst upgrades, and unrealistic expectations. Investments are just like water and they will eventually find their true level. The best thing to do when an investment has had a big run is to take some cash off the table. Realize your gains. It’s better to pay capital gains taxes on a winning investment than to write off a loss on a losing one.
2. Sell when your reason for investing changes.
Did you buy a mutual fund for a particular fund manager? If so, and the fund manger leaves the fund; it’s time to sell.
Maybe you bought a stock expecting a particular product to be the market’s next best seller. If the product flops, it may be time to cut your losses. Too many people stick with an investment for too long and miss out on other opportunities. Early investors that bought Microsoft made a fortune because they got a growth stock in its early stages. Growth investors that bought Microsoft in the 2000’s have been disappointed because the growth story was over at Microsoft. Any material changes that affect your investment thesis are a good reason to cut bait.
3. Stop automatically investing when the price is too high.
The way that most people automatically invest is through dollar cost averaging. They purchase more and more of a security each month until they build a large enough position.
If you think that a stock or mutual fund is trading at too high a value, temporarily cancel your automatic investment. There is no reason to keep buying shares at astronomical prices.
The best thing to do is to store up the cash in a savings account so that you can buy back in when the security retreats. Resume your automatic investment plan once the price drops to a reasonable level. It’s better to wait patiently on the sideline for a better price than to chase a runaway investment.