To buy or not to buy? To sell or not to sell? Those are perhaps two of the most difficult questions that an investor will ever face. Knowing when to buy and sell securities is tough, and trying to choose the perfect moment to get in and out of the market is very difficult for individual investors. Fortunately, there are some rough guidelines you can use to make your buying and selling decisions. We have outlined some tips below.
When to Sell
You made a mistake in buying the stock.
No, we don’t mean you suddenly regret the purchase. But if you did your research, chose your stock, and then realized there was some error in your analysis, it might be right to sell.
When a stock no longer fits in your portfolio.
Your portfolio will evolve as your needs and investing goals change. As that happens, a certain stock may no longer be a good fit. Perhaps you hold shares of a more volatile stock or your portfolio has become overweighted in stocks in emerging markets or the technology sector. At that point, you might want to sell some of your holdings to get your portfolio back on track.
When the business has changed fundamentally.
If you bought stock in a company that did one thing and now it suddenly does something completely different, that might be a good reason to sell. Ditto if something else has changed dramatically (For example, the company’s core product turns out to be dangerous, or the entire industry is facing big challenges). Basically, if the fundamental reasons you bought the stock no longer apply, it may be time to rethink your investment.
When a stock is overvalued.
This one is tricky, and you may need the help of a trained investment professional to help figure it out. But when a stock price continues to increase, it’s not always a good thing. It might be because investors have overvalued the stock. If that’s the case, a dramatic fall could be coming.
When Not to Sell
Because everyone else is.
Investors tend to move in packs. When everyone else is dumping the stock of a certain company, you may take that as a signal that you should get out, too. But the actions of the many don’t necessarily mean that you should behave the same way. Always make your investment decisions based on a careful analysis of both larger economic issues and your own personal situation, not what everyone else is doing.
Because the price has changed.
Shifts in the price of a stock might be a reason to consider selling shares, but that shouldn’t be your sole motivating factor. Stock prices move up and down on a regular basis — that’s the nature of the stock market. If you panic and want to sell every time the price dips, or get greedy and want to sell when the price skyrockets, you could end up with both extra transaction costs and lost potential gains.
When owning the stock is not part of your overall financial plan.
You’ll probably have the most success with investing if your decisions are guided by a solid financial plan. That plan will tell you when it’s a good time to buy or sell an investment. If you’re tempted to make a big move but it doesn’t fit with your overall plan, you should probably hold off or at least discuss your feelings with a financial advisor before making that move. Do you have questions about whether or not now is a good time to buy or sell a stock? Please call if you would like to discuss this in more detail.