When to sell a stock
WARREN Buffett’s favourite holding period for a stock is “forever”, but even he acknowledges there are valid reasons for selling a stock. Deciding when to sell a stock is something both professional and retail investors grapple with. In fact, it’s accepted wisdom that buying a stock is psychologically easier than selling one.
Fundamentally, the two human emotions influencing investors when considering selling a stock are greed and fear. However, selling stocks is a necessary part of your investment journey, and there are right and wrong reasons for doing so. When to sell – several aspects to consider 1. An investment outlook or strategy has changed
Consider, for example, a scenario in which you have bought into a retail company, but the economic environment has changed, so inflation is increasing. In this case, you may decide to limit your exposure to retail shares.
2. A decrease in company growth sales
If a company’s sales growth has notably slowed or its strategic direction, management, or dividend policy has changed, this indicates a key sell signal for many investors.
3. Company acquisition
When news of a company acquisition breaks, the share price of the company being acquired usually surges close to the agreed purchase price. With limited room for further gains, investors might prefer to secure their profits soon after the acquisition announcement, especially if they anticipate potential impacts on the investment’s future appeal or strategic direction.
4. Rebalancing your portfolio
The need for investors to rebalance their portfolio ensures exposure across sectors and asset classes is maintained in accordance with your investment strategy. For example, selling a stock to increase your exposure to exchange-traded funds (ETFs) or fixed income.
Another example of rebalancing is when a single holding becomes too big when considering your overall portfolio. This could be due to the value of the share increasing materially over time, resulting in concentration risk, which could, in turn, justify taking profits.
Despite these guidelines, the reality is that choosing an opportune time to sell is never easy. When selling a stock, you effectively give up further equity upside, so ensure that you are comfortable living with share price moves after selling.
Also, ensure you are selling the stock within the context of your financial plan, which outlines your investment and financial goals for the short and long term.
Just as there are guidelines on when to sell a stock, there are also guidelines on when not to sell.
1. Don’t sell a stock just because its price has increased
Winning stocks increase in price for a reason, and they also tend to keep winning.
2. Don’t rush to sell a stock solely because its price has dropped
First, assess if the broader market is experiencing similar movements or if there’s specific news affecting the company, potentially causing the dip. It could be a one-time event.
3. Review the company’s track record
Check if the company has faced similar situations in the past and bounced back. Evaluate the competitive landscape as well. If competitors haven’t experienced a dip, investigate the reasons behind this and assess whether you still have confidence in the company’s strategy.
Once you have decided to sell a stock, there are further considerations to bear in mind.
Your decision on reinvestment should be guided by why you’re selling in the first place. Is it due to specific stock reasons, or are you temporarily stepping back from the market until your predetermined entry levels are reached for re-entry?
If it’s the former, you’ll need to explore alternative investment options since keeping cash may not yield returns that outpace inflation in the long run.
Also, keep in mind the challenge of timing your re-entry into the market. The recommended approach is to avoid trying to “time the market” and instead execute your buy order when the appropriate time arrives.
Finally, your advisor can clarify the repercussions of the sale, particularly regarding tax implications, and help determine your next investment based on your predefined investment goals and risk profile, ensuring that your overall portfolio remains balanced and aligned with your goals. —moneyweb