Everyone loves a winner. Success in the stock market draws a crowd like a celebrity spotted out shopping — and it’s all the more exciting when you’re the one that made the discovery.
When a stock or mutual fund you own is up, the last thing that’s likely to be on your mind is selling it. You want to see how much higher it will go. You worked so hard to find the right investment and it’s paying off, why would you ever consider getting rid of it?
There’s a common saying on Wall Street, “bulls make money, bears make money, and pigs get slaughtered.”
Basically, don’t be too greedy. Sound advice, but it’s much easier to say than to do in real life.
Paper gains won’t pay the bills
It’s hard to walk away when things are going well. The stocks you want to sell are your losers, cutting losses and reinvesting them back into your winners.
Here’s the catch: profits are only real once you realize them.
A profit on paper doesn’t mean anything if you never actually sell the stock or fund. Even if you end up selling early and the stock or fund continues to rise, you will still have a gain. Nobody can lose money by selling a stock at a price that’s more than the price at which they bought.
I’m not saying you need to sell the moment you turn a profit. If the same reasons you bought the investment to begin with are still true and you would buy it even after you’ve made money, then you shouldn’t sell.
One of the hardest parts of investing isn’t knowing when to buy; it’s knowing when to sell.
The warning signs you should sell an investment
When you buy a stock, you should put a price target on it. Then you know that when the stock hits that target, you need to sell and move on to the next opportunity. The only exception to that is when the stock still looks like a bargain even after you’ve made a profit.
Most stocks will become more expensive as the price rises. Once they become pricier than other stocks on your radar, you may want to sell your stock and put that money to work in a new stock that hasn’t yet realized its potential.
The world isn’t perfect. Sometimes you need to sell before you hit the price target you’ve determined. That may be the case if overall market conditions start to change. If you start seeing negative reports and overall declines, you may want to cash out early and wait on the sidelines until you see bargains emerge again.
It’s important to monitor your investments or they could misbehave and get into trouble without you realizing what’s going on until all your gains have been wiped out and you end up (literally) seeing red. Markets are dynamic, and news can come out that a certain sector is performing worse than expected or that a top executive is leaving under dubious circumstances. All such concerns can be a warning sign to sell and get out with whatever gains you have intact.
The golden rules of selling stocks for profit
Successful investing comes down to one thing: buy low and sell high.
Fortunately, anyone investing for the long-run (10 years or longer) can be confident that their portfolio will appreciate given a long enough period of time.
If you’re a more aggressive investor, however, you’ll want to sell profitable investments in one of two situations:
- The investment is no longer sound or has become too expensive (exceeded your price target)
- You want to liquidate the investment to invest elsewhere, rebalance your portfolio, or use the cash
The key is to not become blinded by paper gains and forget to cash in your winnings when it makes sense to. And if an investment has done so well that it’s become a significant percentage of your portfolio, it’s definitely time to sell and move your money into other areas to reclaim proper diversification and asset allocation.