It’s no secret that the stock market has been exceptionally volatile lately. You might be tempted to unload right now, and get out, afraid of what will happen next. Or you might hold on to a stock, sure that it will turn around when the market does, stubbornly clinging to the “hold” part of buy and hold.
Unfortunately, neither of these options is likely to lead to any sort of true investing success in the long run. When trying to decide when to sell a stock, you need to take a step back and figure out how selling (or not) might affect you in the long run.
Why Do You Want to Sell Your Stock?
The first question you have to ask yourself is this: Why do I want to sell? Do you want to sell because everyone else is selling? Are you holding because you feel you have to keep the stock because of loyalty, or because you don’t want the loss?
Take a few minutes to examine the situation, and yourself. Be honest about why you want to get rid of a stock. From a value or fundamental investor viewpoint, answer the following questions:
- Has something changed fundamentally? Look at the fundamentals of the stock. Is something different? If the market in general is tanking, then it is likely that even the best stocks will drop as well. However, if the company still has strong fundamentals, there is a good chance that it will recover when the stock market does. It might not make sense to sell in such a case. It might be a time to buy more stock than sell it.
- What’s changed? If there is something different fundamentally, ask yourself what has changed. Has there been a shake-up in management? Are you concerned about a new direction for the company? Perhaps profits are dropping and the company is losing market share. In cases where something is disquieting fundamentally, it might be time to sell.
- Could you gain an advantage by selling? Even if you have to sell at a loss, there might be an advantage in unloading. Perhaps you have some capital gains or other income from earlier in the year to offset. If this is the case, a calculated decision to sell might be the right thing to do. You can gain a tax advantage — and if you don’t use your entire advantage, it carries forward to additional years.
- Where are you at in your financial plan? You also need to consider your financial plan. Perhaps you need to rebalance your portfolio. Maybe your investing goals have changed, and a particular stock no longer fits the bill. In such a case, it might be worthwhile to sell, and then use the proceeds to purchase an investment that better fits your current goals.
- Did you made a mistake in buying the stock in the first place? Maybe you thought the company would grow faster than their annual profits have shown. Maybe that new product or service they offered wasn’t as big as you expected. Maybe you outright didn’t understand the investment.
- Could your capital be better invested somewhere else? This is a not so obvious, but important consideration. Would you better off using the capital for other investments that could earn higher returns? Investments you currently own should always be compared to other possible investments. Not only comparing to stocks but to bonds and other alternative investments.
Making a Reasoned Decision to Sell
There are plenty of legitimate reasons to sell a stock. However, selling out of panic, because everyone else is selling, is not one of those legitimate reasons. Before you sell a stock, you need to reason through your decision. If the stock retains the same fundamentals, and if it still helps you reach your goals, there is no reason to sell just because the market is in a panic. However, if something has changed fundamentally, or if your goals can be better reached with another investment, don’t keep holding on — sell.