Invest Financial Planning

When Should You Sell A Stock? 

Howard Gensler  |  June 29, 2023

Buy low, sell high? A look at how to know when it’s time to sell a stock, according to veteran Wall Street investors.

We all know when to buy a stock — when our Aunt Harriet gives us a hot tip she overheard at the hair salon, right? (Oh, how we wish it were that easy!) But what about when to sell a stock? We spend so much time talking about the importance of investing for the long haul that we don’t always talk about when (and how) to unload stocks that we don’t want or need anymore. Here’s a handy guide. 

Know Your Investment Goals

The key to knowing when to sell a stock, says Kristen Ragusin, Senior Vice President of Investments at Raymond James and author of the book The End of Scarcity: The Dawn of the New Abundant World, is to know why you’re invested in the first place. What are your goals? Are they long-term, short-term, or perhaps a mix of both? The second most important thing — which may sound obvious, but isn’t for many investors — is to know what you own, and have a sense of how each holding fits into your portfolio and your goals.

“When you have that clarity, it becomes easier,” Ragusin says. “Is the stock still meeting the objective it had in the portfolio? If the objective was for growth, was it for a specific amount of growth? Was it to yield a certain amount of dividend? And if it’s no longer doing its job, then it becomes an easy decision to put it on the chopping block.”

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Another thing to consider, she says, is how the stock is performing relative to its peers. Although this may sound counter-intuitive, if one stock is greatly outperforming its peers, it may be time to take a profit. On the other hand, if its performance is really lagging behind other similar stocks in that sector, “then it’s definitely a candidate to be sold,” she says. 

Also, for income investors, “if a company cuts its dividend, that is probably the biggest red flag out there,” Ragusin says. A dividend cut, which tends to occur when a company fears not having enough free cash to sustain the dividend, is usually due to sagging profits or mounting debts. Either is a bad sign.

Selling for Rebalancing

Occasionally, selling a stock may depend less on the individual stock and more on your overall portfolio. For example, if a stock begins to dominate your asset allocation, Ragusin says, you may decide to sell some of it to correct a portfolio imbalance and ensure proper diversification. (Here’s a primer on all things diversification.) Sometimes, your asset allocation may get out of whack due to stocks that have proven to be losers, which is not only an indication that it’s time to rebalance — it’s also a signal that it may be time to sell.

Understanding Loss

No one likes to lose money on their investments, which means that sometimes our egos can get in the way of admitting we’ve made a bad call. Ragusin advises her clients to consider that  “Losses in a portfolio are not like losses in life. Never look at a loss in a portfolio like a loss in income. It’s only a loss when it’s sold for cash and then spent. Otherwise it is just an opportunity for rebalancing. My dad used to say, ‘With the markets you pay for your education, one way or another.’”

READ MORE: Active vs. Passive Investing: Your 101 Guide

So, instead of viewing a loss as a mistake to beat yourself up over, look at it as a teaching moment that allows you to put the money into something that you think is going to perform better.

Also, the most important part of understanding loss is the ability to accept that it will happen, even to the most experienced and wisest of investors. After the Great Recession in 2008, many people were so afraid to lose another penny in the market that they pulled out of investing entirely. But those who got out of the market cost themselves an average of $80,000, because they missed out on the rebound when things improved. So, before you sell an investment, check in with yourself (and possibly your professional money manager) to make sure you’re selling for logic-based reasons, not panic-driven ones. 

Whenever You Think “Sell,” Also Think “Buy”

Once you’ve made your decision to sell because 1) a stock isn’t performing as you expected, 2) you want to make sure your stock allocation and/or your fixed- income allocation is being maintained, and 3) you have an organized, well-diversified strategy in place, it’s time to make your next move. 

But what should that next move be? Ragusin says you should have a substitute investment ready — a stock or bond of your choosing, that compliments the rest of your portfolio. “When one is choosing to sell,” she says, “I think that the place where you’re putting the capital plays into that decision.” 

You can take your time deciding where you want to invest — right now you could get 5% by parking your money in a HYSA if you need to put some thought into it — just don’t get too comfortable with your money in savings. As we always say, “It’s not timing the market, it’s time in the market.” So, get back into an investment you believe in as soon as you’re able. 

Hire A Professional

While many investors use a professional money manager for expert advice, others want their trusted professional to function as an objective third party, to help remove the emotion from their buy/sell decisions.  

Longtime personal investment manager Neal Abrams, now retired, uses this example: “Let’s say your dad bought you stock in Lululemon when you graduated college, and after a decade of sterling returns, the stock drops 40% one year. You may have an emotional attachment to that stock and that company because your dad bought it for you as a gift. Or maybe because you wear their clothing when you do yoga, and like the way you look in their workout clothes. Or maybe it was the first stock you ever owned, and it performed really well for a long time for you. Making the choice as to when and if to sell may be particularly difficult for you.”  

That’s where your trusted professional can offer helpful advice and objective reasons  why the company is no longer in the position it was when your dad bought it for you. Your advisor could offer the important perspective that your dad bought it for you precisely so you could earn money — not lose it. “The professional has enabled you to see that owning that stock has outlived its usefulness, and your investment may do better in some other security — a decision that you might not be able to make without their unbiased advice.”

So, trust your gut first, and if you have any questions, trust your professional second. 


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