Most investors will agree that deciding when to sell a stock is more difficult than deciding when to buy one. A steady barrage of stock tips and expert recommendations and easily lure us into buying a stock, but it comes to deciding when to sell, the decision can be quite daunting. If you sell when a stock is down, you might feel as though you’re giving up. And when the stock’s price is soaring, it becomes difficult to part with the stock, even though that may be the best time to sell. Successful stock investing requires disciplines, and that applies to both buying and selling. A selling discipline is important, as it prevents hold and sells decisions from being driven by subjective criteria or emotions, rather than facts.
There’s nothing wrong with holding shares for ten years or more, if they’re the stock of an exceptionally well run company. In fact, the greatest investors of all time have made money by being in stocks for the long term. But even if you are a long term investor following a buy and hold strategy, you still have to sell sometimes, in order to make the best of your investments. So selling discipline is important for any investor.
Perhaps the high volatility in the stock market since past few months is making investors think to sell it all. But prudence is wait until things calm down. But you should not let fear guide your investment decisions. Instead look at these three rules to help you decide if the time is right.
When is it time to sell? There are three simple rules to follow. The first rule to determine whether or not to sell stock is: Sell if a better option is available. Let’s take a closer look at what this implies that your investment decision should stock holding user be viewed as one among various available alternatives. For example, a positive outlook for a stock in itself is not sufficient reason to keep holding, if other stocks are available in the markets that have even better prospects. It’s important to not become emotionally attached to a particular stock, but instead objectively analyze your reasons for holding every stock in your portfolio. If there’ a better option available, go for it. Ultimately, your reason for having a stock is to earn money. Secondly, it’s a critical consideration when applying the first rule that you determine if a superior opportunity is available.
To clarify further, sell existing holding if another stock is available – one that provides higher return potential after factoring in taxes and transaction costs, and one that is compatible with your risk tolerance.
The second rule says. Sell a holding if it has become too large a part of your portfolio. Diversification and rebalancing are two of the most commonly used terms in investing and rightly so.
No matter what kind of investor you are, it’s that your portfolio is well diversified and that you monitor and rebalance it regularly and ensure that the diversification in maintained. So, if at any time one stock grows to more than 15% of your portfolio’s value, take the time to figure out how much risk you are taking on that particular stock. Even if you’ve convinced that the company has good prospects, it’s not prudent to allow any one stock take up a large percentage of your portfolio. If your portfolio is heavily concentrated on one or two stocks, sell part of those particular holdings to ensure diversification. If you have one or two winners, and tie future still looks bright, consider taking some profits off the table and adding to your other holdings, just so you will not be over exposed in case the unexpected happens.
For example suppose you started with a portfolio of which 12% was shares of ABC Ltd. If ABC’s stock price increased in value trough the last year, but there was no much change in the value of other stocks in your portfolio, you may find that ABC has grown to more than 22% of your portfolio’s value. If the ABC’s stock price were to fall due to some unforeseen circumstance, the performance of your entire portfolio would suffer badly. So even if you are convinced that ABC is a good investment, and that its future looks bright, it would still be a good idea to sell some of ABC shares. At the same time consider increasing your holdings in XYZ Ltd, another company in your portfolio with good fundamentals and perhaps an undervalued stock. Or you could buy new stocks.