When to sell your stocks

When the price of a particular stock suddenly drops sharply, many shareholders rush to sell it. Many sell their stocks when the market suddenly heads south, too. Those can be costly mistakes, though.

Don’t sell just because a stock or the market is falling, or you’ve heard some rumors, or someone tells you to sell. Here are good reasons to consider selling:

If you can’t remember why you bought the stock.

If you can’t explain exactly how the company makes money.

If you hold too many or too few stocks. Portfolios should be diversified, but not too diversified. Aiming for around eight to 15 companies is good for most people.

If the reason you bought shares is no longer valid. For example, maybe the company is suddenly facing strong competition.

If the stock seems significantly overvalued. Consider the tax consequences, though. If you expect it to keep growing over the long run, hanging on can be best.

If you find a much more attractive investment. If your calculations suggest that a holding is now fairly valued and stock in another great company appears to be very undervalued, you could gain more in the other stock. (Again, consider tax effects, though.)

If there are red flags such as shrinking profit margins or steep debt. Short-term problems can be OK, but look out for long-term ones.

If you’ll need that money within five (or even 10) years, it should be in a less volatile place than stocks. Consider a money market account or a CD.

If you’re only hanging on for emotional reasons.

Focusing only on whether to buy a certain stock and not giving much thought to when you should sell it is a costly blunder. If you leave your dollars in a poor investment, they can’t grow for you in a great one.