When to sell a stock

We often talk about buying a stock, but it is equally important to know when to sell a stock. Investors can make mistakes, such as selling winners and holding onto losers.

You can avoid many of these mistakes by applying selling discipline.

In today’s issue, we will look at:

1. Selling because you need cash

2. Selling because your investment thesis was wrong

3. Selling because the situation has changed

4. Selling because there are better opportunities available

 Selling because you need cash

It is fine to sell a stock because you need cash. The most important thing is that the investment horizon is matched to the instrument. What I mean is, if you have a short-term cash requirement, then a savings account or money market account is more appropriate than a stock. If you are buying a stock (or an equity fund), ideally your holding period is longer than 5 years.

The purpose of the longer holding period is to manage market volatility. Over short periods of time, you can lose money in equity investments due to price movements. However, over longer periods, prices tend to go up.

Selling because your investment thesis was wrong

When you purchase a stock, you should have done research and have an investment thesis which explains why you bought the stock. But there is always uncertainty in investing. You have an idea of how things could go, but reality usually plays out differently.

If your investment thesis was wrong, the best course of action is to admit that you made a mistake and sell the investment.

Whatever you do, don’t be tempted to hold on until it gets back to your purchase price. That is not a sound basis for remaining invested. If you lose money by selling the stock, you can make the money back in a different way to how you lost it.

Selling because the situation has changed

Let’s assume your investment thesis was correct but the situation in the company changes. This might be a reason to sell your stock. For example, if you were invested in a food company and they sold unsafe products, the company might face years of legal challenges.

Your initial investment thesis might have been sound and the company might still be good, but the situation has changed and the potential financial liabilities make this a bad investment.

Selling because there are better opportunities available

The final and perhaps most exciting reason to sell a stock is because you have found a better opportunity.

Of course the tricky part is to be sure that you really have found a better investment, because selling might trigger taxes and trading costs. But once you are confident that you have found something better, then switching can be a good thing.

Conclusion

Selling is as much a part of investing as buying is. But you must be sure that you are doing it for the right reasons. While it is perfectly acceptable to sell at a loss, if you are constantly buying-high and selling-low, you are doing something wrong.

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