When is the best time to sell stocks?
Recently, I bought some shares in a couple different ETFs. I have known all along that my strategy for these recent investments will be buy and hold long term (20+ years). Yet, I still have to mentally refocus myself every time I log into my account and see those red numbers. It begs the questions: when is the best time to sell stocks? And how do you know when you should sell and when you should hold? And how do you calm yourself down when your investment account prints the money lost in big red numbers at the top of your account?
So, your personal, individual decision of when is the best time to sell for YOU is going to be based off of a number of variables.
First, what is your investment strategy? Your answer should be long-term (a year or more ideally). If it’s not, then don’t invest your money at all. Put it in a high interest savings account instead (you can read my article on high interest online savings accounts here).
Ok, so you’ve got your money invested long-term. But how long-term is the next question? Do you need your money in the next 5 years? Or you’re planning on letting it sit much longer than that? Your answer to these questions will also play a big role in whether or not to sell your stocks. I would say that if you’ve made some risky investments in stocks in something like a brand new company, and you are planning on needing that money pretty soon, like in a couple years, you should sell those stocks now (unless everything has been going very well, the growth has been very exponential and they’ve been keeping up with the demand, and you know the industry very well; but if this is just some company you’ve picked because you read one article about it, the growth has been pretty stagnant so far, and maybe you’ve even lost money at this point, then yeah, you probably need to sell that because you probably aren’t going to make a profit in 2 years on this random start-up) and put that money into something less risky. The general rule is the longer you’re planning on waiting before cashing out, the more risk you can afford to take.
Now, if your investment strategy is VERY long-term, and you’ve made some risky investments that haven’t yielded a profit yet, I would advise doing some research on those investments to determine whether to keep holding or to sell before you lose too much. Just how risky were the investments? How well do you know the industry? How much competition does this company have and how have they been handling it so far? What are their actual chances of being successful one day? How much historical data is available and how has it been trending? And how long have you actually been holding said investments? All of these questions should also help influence you on the big decision to sell or to hold.
If this is a new company, you’re going to have some issues here because there might only be a few years or maybe even less of history available to analyze. In which case, you’re going to have to rely heavily on your industry knowledge and the perceived risk level you took with that investment and how it has performed so far. But if there are 20+ years available, that helps you out a lot. Look at how it’s been doing the past year, the past 3 years, the past 5 years, the past 10 years. Has it been going up long-term? Then you probably need to calm down and remember your long-term investment strategy. But, if its performance has been getting worse and worse, you probably need to sell unless you’re an expert in the industry and are expecting some big turnaround.
Also, look at how it typically performs over the course of the year. Is it in an industry that is seasonal (like education)? Maybe it does have a period where it plummets, but does it always come back up when demand starts coming back up? Again, your investment strategy is long-term (right???), so no need to freak out. Just wait it out (and remind yourself of this again next year before you freak out again). Also, remind yourself yet again of this when you’re eventually getting ready to sell. Make a note that says prices have historically been the highest in February and the lowest in August or whenever, so February is when you should sell (and if you decide to buy more shares, August is the time to buy). Of course, reevaluate all this again the year you decide to sell, as well, because even if its historical performance has been the same year after year, that is never a guarantee of the future.
The next important factor to consider is how diverse are the investments? Generally, the more diverse, the safer you are. Is this one stock we’re talking about selling here or is it an ETF comprised of the entire S&P 500 Index?
General Guidelines For Selling
Ok, so you’ve done your research, you’ve invested long-term, now how do you know when the right time to sell is? Some very general guidelines most investors use are based on, surprise, quite a few factors. Here are some typical ones:
- Mergers: short answer: almost always, shareholders get a higher price after the buyout closes than they would selling before it closes. (Read more about mergers and acquisitions here.)
- Bankruptcy: this one is kind of obvious, you should sell or realize the loss in order to offset future capital gains (for tax purposes)
- Target price is reached: this is not a strategy I use, but some individuals do. This is when you buy a stock for, say $20, and decide you want to sell it when it reaches, say $100, and you’ve made a profit of $80 (most individuals actually use a target price range, not necessarily a specific price point). I would rather just buy shares and hold (assuming the price is going up) until I need the cash.
- Opportunity is better elsewhere: if you own stock(s) in whatever sector, and there is an equivalent option that statistically, historically, performs better, it is better to sell and invest in the better opportunity instead
- Cutting your losses: sometimes you’ve done all your research, you’ve waited patiently, you really thought you picked a winner, but your stock(s) just isn’t performing and the future doesn’t look promising either. Now is when it is time to devise an exit strategy. There is no universal “ideal” amount of losses to take before you sell. You will have to evaluate the situation and decide what changed, what you think the future will hold (chance of a rebound), and how much money you can afford to lose, worst case scenario, before you’re willing to sell. Remember the break even fallacy (a stock that loses 10% of its value, then needs to regain 11.1111% for you to break even, a stock that loses 20% needs to regain 25% to break even, etc…). (Read more about deciding when to cut your losses and the break even fallacy here.)
- Dividend cuts or elimination: when a company starts cutting, or eliminating altogether, dividends, this is typically a signal that you should get out. This is usually a sign of some serious financial difficulties and you should pay close attention.
If you want to read more about selling strategies you can check out this article that discusses several different investors selling strategies here.
The best time to sell a stock is unique to each individual and requires quite a bit of research. There is no one time or percentage of losses to take before deciding to sell, you have to analyze all the information you have available to make the best decision for you. But, hopefully this article helped guide you in the right direction.
What do you all think? When do you usually decide to sell stocks? Have you ever made a bad decision and sold too early and regretted it? Have you ever sold too late and regretted it?