Many investors put a lot of focus on the best time to buy a stock. However, knowing when to sell a stock is just as important. It is generally a bad idea to sell a stock solely because of stock prices movements. On the other hand, there are some situations that can be perfectly valid reasons to hit the sell button. Here are five of them.
- Your business has changed
There is no way around it: businesses changes – sometimes significantly and not for the better.
We would be talking about major acquisition, a change in management or a shift in the competitive landscape. When this occurs, we incorporate the new information and re-evaluate whether the reasons we bought the company in the first place still hold true.
We would consider selling if:
- A new competitive threat emerges and the company is unable to compete with the superior product or service
- New management is making reckless or questionable decisions
- The company’s growth has slowed because the business is not investing in necessary research and development
- New regulations have dampened the company’s ability to earn the same profit margins it has historically generated
- The company has not adapted to changes in consumer needs and demands
When evaluating unfavorable development in a company’s industry, it is important to differentiate between temporary and permanent changes. In a downturn, even the best-run companies may suffer. What is important is to see how a business can use or turn the negative events into its advantage to improve its competitive position.
- Your investment thesis was faulty
You should seriously consider selling if your rationale for buying the stock was flawed, your valuation was too optimistic, or maybe you underestimated the risks. Yes, it feels awful to make a mistake – but it happens, even to the best investors. It is always better to acknowledge the error, accept responsibility and move on.
- You found a better opportunity elsewhere
In a perfect scenario, you will always have spare cash to invest each time you identify an attractive investment opportunity. However, that may not always be the case. There is nothing wrong to sell a less attractive stock (even at a loss) if you think you have discovered a better deal elsewhere.
- You need the money, or you will soon
Needing the money is certainly a good reason to sell. And this applies whether you need the money now or for a predetermined time within the next few years.
As an example, a friend recently sold some of his shares to fund his real estate agency business. It is not that he really wanted to part with his shares – he just needed the money for his new venture.
Another example is if you plan to use part of your investment portfolio to send your children to university. When your children are young, it makes complete sense to invest their education fund in the stock market. But once there only a few years away, it may be wise to move that money into cash or equivalent investments to protect against any capital loss.
- Your investment keeps you up at night
It is hard to put a dollar value on peace of mind. If your investment causes you to lose sleep, it could be a sign that you have taken more risk than you are comfortable with. We save and invest to improve our quality of life, not the opposite. Therefore, if you are stressing constantly about a stock, it could be time to move your money elsewhere.
Knowing when to hold them
Here is one of the most important things to notice. None of the reasons above mentioned anything about the share price of the stock itself, or how much it has gained or lost since you bought it. In fact, making investment decisions solely on price changes can be dangerous.
Many investors decide to sell simply because their stocks go up. They justify the selling by saying “it never hurts to take a profit”. However, regret sets in when they realise too late that stock prices went up for a reason, and the company still had tremendous growth potential. It is also common mistake to sell simply because stocks go down, “before things get worse”. Yet, a sell-off could be the perfect opportunity to accumulate shares at discounted prices.
The bottom line is that there are some very good reasons to sell stocks. Selling solely on stock prices is not one of them. The majority of stock investors underperform the market as they are too concerned about stock prices. Over trading is one of the key reasons. Time in the market is more important than timing the market.
We leave you with a quote from legendary investor Peter Lynch. “A good stock can take several years before it really pays off. Give your investment time to grow. No one can tell you when the right time is to sell a stock. You need to have patience. If you are averse to risk, the stock market is not for you”.