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.
It is important for investors to acknowledge mistakes quickly and move on. Many investors will not 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.
Many investors instead hold onto their losing stocks letting their emotions and ego take over. However, usually, the investor’s long-term profits will balance out any errors made by the investor.
Unfortunately, however, many investors will hold onto their losing stocks too long. They hope to break-even or for the stock to go up again in value! This is a big mistake and many investors have “lost” large sums of money doing this! Investors can magnify their losses this way. They would have fared better by admitting their mistake and selling their losing stock 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 mistake the investor is less likely to repeat the same mistake going forward!
Another reason to sell a stock is when the company the investor chose no longer meets the “original” criteria for buying it in the first place! For instance, the company’s fundamentals may have “deteriorated.” Or there may be a management change with the new manager not meeting the quality standards of prior management.
In addition, the investor can “minimize” their losses by not holding onto losing stocks longer than they should. The investor would be better off selling and reinvesting the proceeds from the losing stock into a more profitable company.
Another reason to sell a stock is if a company has new management that is not performing as well as former management. Also, keep an eye on your company’s fundamentals. If they start to deteriorate it may be time to sell. It is important that the investor monitor their portfolio periodically to make sure there are no changes in the company’s management or fundamentals.
An investor, however, should not consider selling if they own stock in a company with great fundamentals and management. It is not a good idea to sell if the fundamentals of the company remain unchanged. Hold onto your winners long-term! It is also a good idea for the investor to keep up with current news on the company they are invested in.
Another reason to sell would be if the investor finds a more promising company that offers “better” returns. This may be a situation in which one could consider selling after researching the new company thoroughly. The investor should, however, take into consideration the capital gains tax they could incur on the sale of their “existing” stock.
However, 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! Instead, during market declines, an investor should stay the course and take advantage of the opportunity to buy more stocks at a “discount.” An investor needs to “buy low and sell high!”
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! This is why it is so important for an investor to monitor their portfolio periodically to make sure nothing has changed in the company.
Moreover, it would be to the investor’s benefit to reinvest the proceeds from the sale of the “losing” stock into a more profitable company! 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.”