To make a successful investment, you must know when to buy and when you should sell. The reality is that there are only a handful of companies worth holding onto for long periods of time—and there are very few investors who are perceptive enough to buy only those companies.
There will always be good times to sell stocks we own, and knowing when to sell is just as important as knowing when to buy. Yet we often find ourselves selling our winners too early and holding onto our losers too long.
Here are some questions to ask yourself to help decide when it’s time to sell your stocks.
Did you make a mistake?
Don’t hold onto a stock you bought for a reason that’s no longer valid. You may have bought stock thinking that management could turn the company around only to later learn that the task was harder than you predicted. Or maybe you hoped that the company would expand into other niches but you overlooked strong competitors in those areas.
Whatever your initial reason for investing, if you learn that it’s no longer the case, cut your losses, sell your stock, and re-evaluate your investing strategy.
Have the fundamentals changed?
Sell your stock if the company has stopped growing, its core business has slipped, or other fundamentals have changed. After several years of accelerated growth, the company you bought has started to show signs of slowing down. There is growing competition in the industry and your company is having a harder time finding profitable new investment opportunities. Could this be the time to reassess the company’s future prospects? If they’re significantly worse than they used to be, it may be time to sell.
Is the stock overvalued?
No matter how great the prospects of a company, the price of the stock still has to be right for a great investment. Popular, thriving companies frequently trade well above their intrinsic value. Trouble is, with such high expectations, the stock may not have much more room to run.
Estimate the stock’s intrinsic value and ask yourself a.) How much more you think the market is willing to pay you than your estimate and b.) How likely it is that your estimated value could go up over time?
You don’t have to sell great companies just because their stock is pricey, but you should be careful when expectations become too high.
Do you need to rebalance your portfolio?
Periodically reassess your portfolio and make changes when needed. Paying attention to your portfolio and periodically making calculated adjustments is critical. For example, if you’ve been slowly buying more and more technology stocks, a regular review of your asset allocation could reveal that your portfolio is too heavily weighted in that area.
Although this may be great if technology stocks are doing well, putting all your eggs in one basket will come back to haunt you later. No matter how profitable a company is, if an investment is a significant portion of your portfolio, it’s time to consider selling some.
Is there something better you can do with your money?
Always look for ways to compound your money at the fastest rate relative to your risk tolerance. There is no shame in selling investments—even those that are undervalued or those where you’ve lost money—to free up cash for another investment that might yield you a higher return.
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For example, if you see that a company’s stock is trading at a large discount from what you think it’s actually worth, you may want to think about selling some stock that you believe has the smallest chance for more growth to free up some cash.
Before making any investment, research the company’s business inside and out. When you decide to buy stock, consider your exit point as well so that you aren’t stuck holding onto stocks that have small growth prospects. Good luck!
What do you think? When do you sell stock? Share your strategies in a comment.