Last summer, I was delighted to speak, once again, at the Orlando Money Show (in person!!!) I love doing the shows for two reasons: 1) It’s great to meet and get reacquainted with our subscribers as well as the financial advisors, and 2) The questions asked by the show attendees are usually very thought-provoking. And one that comes up every time is this: “When should you sell a stock?”
That’s a perfect question to ask yourself after the summer market rally.
If you happen to own a stock that’s declined from the price at which you purchased it, (there are some of those out there!), you know that you haven’t lost any money until you sell it. But do you just continue to watch it fall, or should you take the plunge, sell it, and cut your losses?
Alternatively, if your stock has zoomed up to the stratosphere, do you cash in, or just ride the wave? But if you do that, how long should you continue holding?
There are lots of reasons to sell some of the stocks in your portfolio, and they are the reasons you would sell them in any market. I’m talking about your losers—those stocks that are going nowhere, as well as your winners that have reached their price targets or have become stuck at a resistance level that has proven difficult to surpass.
The primary reasons to sell a stock are threefold: 1) If the fundamentals of the company have deteriorated to the point where you do not think it can recover; 2) You believe there is no more upside to the shares; and 3) You’ve decided to play it a little safe and take some of your gains off the table.
When Should You Sell a Stock if it’s a Loser
If you are holding shares in companies in which the fundamentals of their business were teetering on the brink of insolvency before the coronavirus hit us, then, face it, they are the likely companies to fail and have not been able to spring back. Or they may be operating in industries that took a big coronavirus hit and just didn’t recover. Or they may just be dogs!
Some of these failing indicators would be:
- The fundamentals of the company have deteriorated.
- The company has been losing money for a while.
- It is overloaded with debt.
- Revenues were shrinking before coronavirus.
- The company is in a declining sector.
- The stock has fallen below your stop-loss limit (actual or mental).
- Its price-earnings ratio has gone too far below the normal range for the company.
- Your cyclical stock is near the end of the cycle.
Now, if your stock doesn’t fall into any of the above categories, and you’re asking when should you sell a stock, I would put it through these last three tests:
- Are all the reasons I originally bought this stock still in place?
- Is my price target still valid?
- Can I make more money by retaining the stock than by substituting another investment?
If the answer to any of those questions is no, it’s time to bail, and go on to investments with greater potential.
If you are still happy with the company and satisfied with its potential, then keep the stock. If not, sell it and look for greener pastures.
When Should You Sell a Stock if it’s a Winner
Since the market has been on a bullish run this year, you may be holding on to quite a few shares right now that have reached price targets well beyond what you may have initially set. If that is the case, you may want to consider cashing in on some of those winners.
Here’s a quick way to determine if you should cash in right now:
- A company turnaround has been completed and you don’t think there’s more upside to the stock in the near future.
- The company has just completed its second phase of rapid growth (which might be hard to reproduce in the short term).
- If you are holding a stock you bought as an asset play (such as a takeover), and you still think that may occur, wait for a raider to come in and pay you a premium, then sell.
- Its price-earnings ratio has gone too far above the normal range for the company.
- You want to take partial profits. When your stock has reached its price target is a perfect time to take some money off the table. If I think the stock still has some momentum left, I usually will sell one-half of my holdings in it, and let the rest ride.
- Your stock has reached your price target, and you don’t think it has the right stuff to keep going higher.
I hope these tips are helpful. As I always tell my subscribers, “It’s okay to fall in love with the company, but not the stock!” It’s incredibly important to monitor your portfolio—in good and bad markets, so that you can elevate your gains and mitigate your losses.
What stock selling strategy do you use to trim your portfolio?