When Should You Sell A Stock? Here Are 5 Simple Rules
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.
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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.
Rule 2 and 3 sound like how to lose money by timing the market. Have follow these rule in the past and lose ton of money because of them.
I’d say now, and put the money in an index fund….:)
I agree. I am making the shift now as I am working on rebuilding our portfolio.
I think the 10% threshold to sell is too high. Think in terms of the stock going to 0, which could happen. Are you ready to lose 10% of your portfolio?
My view is that it is time to sell some, when a stock exceeds 5% of your portfolio.
Clearly, knowing when to sell is very difficult. I would disagree with #3 however, where one sells when a stock loses 10%. Based on that rule, one could sell all of their stocks when the markets drop 20%, and end up out of the market (which has happened twice in 16 years). The tricky part is differentiating between a stock that is temporarily down, and one that won’t recover. That’s why the approach of buying a broad market is easier because you are then betting on diversified capitalism, and not one instance of it.
I don’t think some of these rules can really apply to dividend investing, especially in a long-term perspective. Maybe someone near retirement could benefit from rule #2 and #3.
Cheers!
Mike
1-3 seem like bad rules to follow…