You bought some stock on a whim a few years go. Maybe it was doing great for a while, or maybe it has been yo-yoing. Maybe you are so sick of looking at the stock that you think it is time to sell.
Before you pull the trigger on that sell order, there are a few things you should consider. Run down the 6 items on this checklist to see if you really should sell those shares of stock, or if you should consider holding onto them for a little while longer.
6 Questions to Ask Before You Sell
1. Did You Lose 10% of Your Investment?
Most financial planners suggest dropping a stock if it falls 10%, but ultimately the decision must be based on your risk tolerance. You should decide before you purchase the shares of stock how much you would like to see the stock grow and how much you are willing to lose on the investment. If your goal is for the stock to increase by 20%, then you should sell it if it reaches that point. Selling your shares if they hit the 10% loss mark will keep you from holding onto bad stocks that may continue to spiral down.
2. Has the Reason You Bought the Stock Changed?
You usually buy a stock because it’s cheap, has momentum, the underlying company offers fantastic products or services (think Apple) or is about to come out with a new product or service, has an advantage over its competitors, or a combination of all of these things. You should have a reason why you are buying shares of stock in a company. You should also have conviction that the share price will rise higher than the one you paid for a specific reason. If that reason does not pan out, if your rationale fails to materialize or the story changes, you should probably consider selling the stock.
3. Do You Need to Rebalance Your Overall Portfolio?
If you have a well-diversified portfolio, then you inevitably have some sectors of the market that are doing a little better than others. Most financial experts recommend examining your portfolio at least once a year and rebalancing your holdings to ensure that you have the right mix of assets based on your overall financial plan. Did small cap stocks have a great year? Rebalance your portfolio every year by selling the winners and buying more of the stocks that didn’t do as well. This will help ensure you are sticking with that fundamental investing rule of buying low and selling high.
4. Have You Considered the Tax Consequences?
If you are thinking about selling investments that you hold outside a tax-sheltered retirement plan, taxes should be a big factor in your decision. If the investments are inside a 401k or similar retirement plan that is sheltered from tax, then it is not an issue unless you are withdrawing funds in retirement. But don’t automatically discount selling because you have to pay taxes. You do not have to pay taxes on losses that you realize, and you should add taxes into your profit taking criteria. For example, if you want to earn a 20% return on your stock purchase, you should consider that an after-tax rate of return. With a 15% tax rate on capital gains, you should sell when your shares appreciate by 23%, which would give you that 20% return on your investment, plus 3% which is 15% of your capital-gain profits.
5. Do Market Data Give You a Reason to Sell?
Have you studied the market data about the companies in which you own shares of stock? Did you hear something interesting in the quarterly conference call that the company hosted for professional stock analysts? These conference calls can be listened to live on the internet through sites like Yahoo Finance and others, and they provide an incredible wealth of knowledge about the company, where it is going, and how the stock should perform in the near future. So many individual investors do not take advantage of these conference calls, but they provide a unique take and information that many other investors don’t have. It may also be a good idea to utilize stock alerts services like Jim Cramer’s Action Alerts PLUS.
6. Have You Considered Transaction Costs?
Transaction costs are a big factor that you must consider when selling a stock. Most brokerages charge you a commission when you buy and again when you sell shares of a stock, which will continue to add to your loss that is already built into the stock’s share price. Also, are you selling your shares in one shot or parceling it out over a period of time? If you own a large block of shares, you could find yourself being charged a commission several times by the time your broker manages to sell all of the shares that you requested.
You only lose money if you sell your shares of stock. Before you actually sell them, the losses are just paper losses. So, if your reasons for selling did not check out after going through this list, you may want to reconsider. Maybe you should consider holding onto your stocks for a little while longer. There is no set rule on when to sell a stock. It depends on your individual financial objectives, how much risk you can stomach, and what goals you have for your shares.
Most individual investors are “buy and hold” investors, who hold stocks for the long term but not forever. Long-term investors should not fear occasional swings in the market. When the market dips or takes an unusual turn, that is the perfect time to review your portfolio, re-evaluate your investing strategy, and ask yourself some of the questions listed above. But it is not a time to just jump ship. Before you decide to sell, ask yourself if the stock still meets your financial goals.