When Should An Investor Sell Their Stocks?
When should an investor sell their stocks? The first and very obvious reason I will discuss is when the investor has made a mistake in the judgment and selection of their stocks.
When They Have Made An Error In Their Judgement:
It is important for investors to acknowledge mistakes quickly and then move on. Many investors are reluctant to sell a losing stock. Investors should be honest with themselves and exercise self-control in this situation.
Why do investors hesitate to sell their losing stocks? Several factors can come into play. One reason is many investors do not want to admit that they have made an error in judgment. It is almost a given that a certain amount of errors are going to appear when investing in stocks. However, usually, the investor’s long-term profits will balance out any errors made by the investor.
Many investors instead hold onto their losing stocks and let their emotions and their ego take over. Investors can “minimize” their losses by not holding onto losing stocks any longer than they should. Some investors hold on hoping to break-even or even for their stock to go up again in value! This is a big mistake and many investors have “lost” large sums of money doing just this! Investors can definitely magnify their losses this way. Investors would have fared much better by admitting their mistake and selling their losing stocks much sooner.
Moreover, an investor should try to learn a valuable lesson from their misjudgment of a company’s stock. By reviewing, and understanding, their mistakes the investor is less likely to repeat the same mistakes going forward! They would be better off selling their losing stocks and reinvesting their sale proceeds into more profitable companies.
When The Stock No Longer Meets Their Original Criteria:
Another reason to sell a stock is when the company the investor chose no longer meets the “original” reasons for buying it in the first place! For instance, the company’s fundamentals may have “deteriorated.” If they start to deteriorate it may be time to sell. This is why it is so important for an investor to monitor their portfolio, periodically, to make sure nothing has changed in the company they are invested in. A great way to do this is to set-up spreadsheets, listing the company’s statistics, for each one of the companies you are invested in. Your spreadsheets will alert you to any changes over time and can assist you on whether or not to buy more shares of the stock or to sell your existing shares.
Another reason to sell a stock is if a company has new management that is not performing as well as former management. An investor, however, should not consider selling if they own stock in a company with great fundamentals and good management. It is not a good idea to sell if the fundamentals of the company remain unchanged. Make sure you hold onto your winners long-term!
When The Investor Has Found A More Profitable Company To Invest In:
Another reason to sell would be if the investor finds a more promising company that offers “better” returns. If the company they invested in is not doing well then choosing a more profitable company could be a good reason to consider selling. Of course it is important to research the new company thoroughly. The investor should, however, keep in mind the capital gains tax they could incur on the sale of their “existing” stock.
Selling Stock During a Market Downturn
It is important to not panic and sell your stocks, especially if you are a long-term investor, when the market enters into correction territory or is in “bear” mode. In doing so, you could be selling your stocks at a loss and giving up future gains! Instead, during market declines, providing the company’s fundamentals stay strong, you should stay the course! This requires an investor to exercise great patience and discipline. Remember holding your good stocks long-term is the key.
A market downturn is a good time to take advantage of the opportunity to buy more stocks at a “discount.” Always keep in mind an investor needs to buy their stocks low and sell them when they are high!
Selling Your Stock Could Trigger a Capital Gains Tax
It is advisable to consider taxes before selling your stocks. Have you owned the stock short-term, or long-term? Short-term is a holding period of less than one year with any capital gains being taxed at the investor’s “normal” tax rate. Long-term, with a holding period of greater than one year, will be taxed at a “lower” favorable capital gains tax rate. Try to hold onto your stock for more than a year or you will be taxed at your normal tax rate.
In conclusion, one of the major reasons for selling stock would be when the investor has made a mistake in their stock purchase. The investor would be well advised at this point to admit their mistake. They should not hold onto the losing stock any longer than necessary.
An investor should also sell their stock if the reason they bought it in the first place no longer applies! It is advisable to note the reason you bought the stock.
It would be to the investor’s benefit to reinvest the proceeds from the sale of the “losing” stock into a more profitable company! It is also advisable to hold your stocks for more than a year to take advantage of the lower long-term capital gains tax rate.
Ideally, however, an investor should strive for long-term investing and seldom sell any of their stocks! Quoting Warren Buffett, the greatest investor of all time: “Our favorite holding period is forever.”
