One of the questions that many ask is whether it is time to sell my stock. Deciding when to sell a stock is important, and a tougher call than when to buy a stock. As you consider what’s next for you and your stock, consider the following items:
Don’t Sell Based on Fear
The first rule of investing is to avoid making decisions based on fear. Don’t sell your stock just because the market is crashing and everyone is rushing to unload. Remember: Until you actually complete the transaction, your losses are only on paper. Once you pull the trigger, you lock in those losses. Doing it because you’re afraid and your judgment is clouded can lead to real regrets later. Stick to your financial goals, and consider the consequences of your actions.
David’s Note: While thinking about the lost wealth as paper money might a good way to trick yourself into holding on, when the value of stocks you own goes down, you have lost money whether you lock it in by selling or not. The problem for most people is that they sell their stocks when everything seems to be going down due to fear and buy when things look rosy, which is a recipe for disaster because they end up buying high and selling low. When you are afraid, wait till you calm down, and sit back and write down your investment record. If history shows that you tend to buy high and sell low, then buying and selling individual stocks on your own is not for you. And that’s okay, because there are many alternatives. Pick one, like owning index funds instead, and if the new strategy involves getting rid of your stocks, then do so.
Consider the Fundamentals
Before you sell, you should consider the fundamentals of the stock. Why did you buy in the first place? Was the market share growing? Did you like how the competent management kept the company cash rich, yet still re-invested in the company or paid dividends? Think about why you liked the stock to begin with. Has something changed? If nothing has changed, and the company is still solid fundamentally, you might be better off keeping the stock — and maybe even buying a few more shares while you can get a good price.
On the other hand, if there is a fundamental difference in the company, you might be better off selling before things head lower. Carefully consider the big picture.
Are Your Goals Being Met?
In some cases, you might want to sell and take profits if the stock’s performance improved. Once your goals for the stock have been met, and you are concerned about a sudden drop in the future, it might not be a bad thing to sell. Consider your long-term financial goals. In some cases, a stock may be under-performing, and not helping you reach your goals, or your asset allocation may have changed. In either case, you might be better off selling and then buying another stock that will help you better reach your goals.
Is there a Strategic Advantage?
Another consideration is the strategic advantage. At times, selling at a loss can be advantageous for your taxes. You can offset some of your capital gains with the help of losing stocks. As we head into the last part of the year, it’s a perfect time to consider your tax liability and what you can do to reduce it. One way is to sell a few investments at a loss. Before you do this, though, carefully consider your situation, and what you will gain. It might help to consult with a knowledgeable financial professional or tax accountant to help you work out the best way to approach this.
Selling a stock can be a tough decision. It’s not something to be taken lightly. Make sure you consider your long-term goals, and look at the big picture. Don’t decide based on fear, but decide the best course of action after looking at your situation and then deciding what would be most beneficial.
David’s Note: Most people should just buy index funds even if they can beat the market, so never mind those who can’t beat the market. A select few will do well owning individual stocks, but most people should just do themselves (and their family members who they strangle when stocks do badly) a favor and just stick with market returns, as it’s much easier to stay the course without owning individual stocks.
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