The stock market has hit some all-time highs recently, which makes some investors nervous. Is it time to sell?
Knowing when to sell, especially in a bull market, is the hardest thing about trading. It’s not an “all or nothing” decision. Don’t change a strategy that’s working for you. Ask yourself if the stock still meets your financial goals.
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Even the classic buy-and-hold strategy where stocks are held for the long term doesn’t mean you have to hold on to them forever.
Here are some general rules for when to sell a stock:
1. When a stock exceeds 10% of your portfolio
If a stock’s weighting has increased because the price has risen more than the other securities you own, reduce the weighting to a maximum of 10%.
2. Take your profits
If your stock increases in value by 25% to 50% – take your profits.
There’s no guarantee the run will continue. You can also take all your original investment off the table and can keep riding a winner as long as you want.
Dividend investors will take exception to this point. Increased share price is a nice bonus to regular income. I suggest you take a look at the current dividend yield. You may find something better that still meets your requirements.
3. Sell when the stock loses 10% or more
There are many reasons why a stock’s price will fall and you need to determine the cause. Maybe the business is ailing, or the fundamentals have changed.
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No one likes to take a loss. Be objective. If it’s unlikely to turn around, your best move is to take a capital loss and move on. This keeps you from holding on to a bad investment that may continue to spiral down.
4. The reason for owning no longer works for you
Perhaps you got lucky on a tip you heard from your co-worker. You’ve had a good run, but the stock doesn’t really fit in with your investment strategy.
Your financial circumstances, risk tolerance and time-line have changed.
You require dividend income and the stock’s dividend has been reduced, or even eliminated. Can the circumstances be easily fixed? Cyclical industries like resources often will cut their dividends and then raise them again. Can you wait it out?
Or, maybe something else is better fit for you.
5. You made a mistake
It happens. The investment was just not suitable for you. Have the discipline to accept the facts and admit you were wrong. Learn from your mistake and go on to make better choices.
Sell by design – not fear
Investors spend more time searching for stocks to buy than thinking about when to sell and the majority of investment advice is geared towards buying – what, when, and the right price.
Knowing when to sell is also important. It allows you to:
- Preserve gains, and
- Reduce the likelihood of incurring major losses.
The concept is simple. The execution is tricky.