Reasons When Should You Consider Selling Your Stocks?

Many investors wrestle with deciding when to sell stocks and take profits. Selling too early could mean leaving returns on the table while holding too long, which could result in watching those gains evaporate if the stock falls. Determining the ideal time to sell requires balancing various factors and aligning with your investing style and objectives. 

This article explores key considerations around selling stocks to give you a thoughtful framework when that decision point arrives. 

Read on for time-tested guidance on making a prudent choice to sell or continue holding stocks.
When To Sell a Stock: 7 Reasons and Timeframes

1. Rebalancing to Manage Risk  
It is important to keep your investments in balance to match the risk level you're comfortable with. If some of your investments do well and become a bigger part of your portfolio, you might need to sell some of them to keep things in balance. 

This helps protect you from big losses if those investments don't do well later. Reviewing your investments every 6 months to ensure they're still balanced the way you want them to be is a good idea.

2. Fund Need or Goal
If you have a financial goal that needs immediate funding and a clear idea of how to sell shares can be a good alternative. For example, you may need to make a down payment for a house or pay for tuition. 

To make this process easier, you can set a timeline-oriented goal and plan which shares to sell in advance. This way, you can be strategic instead of reactive.

3. Shift in Business Fundamentals  
It is crucial to conduct regular assessments of the factors that initially led you to invest in a company, such as its competitive advantages, growth drivers, and market opportunities. Doing so lets you determine if these factors are still present and strong enough to justify your investment. 

If the company's business fundamentals start to deteriorate, consider reallocating your capital to better investment opportunities. This way, you can protect yourself from potential losses and make the most out of your investments. 

4. Overvaluation 
When analysing a stock's worth, it is important to compare its valuation to historical levels and projections for the next 3-5 years. Suppose the stock is substantially overvalued, and its price is based on the assumption of perfection. 

In that case, the risks associated with investing in the stock become greater than any potential further gains. Therefore, it is crucial to approach such stocks cautiously and carefully weigh the potential risks against any expected benefits.

5. Tax Harvesting  
If you have invested in securities and have some winners and some losers, you can sell the stocks or funds that have lost value to offset the capital gains taxes owed to the winners. This is a useful tax strategy that can improve your after-tax returns. 

However, it's important to act before the end of the year and refrain from buying back the same security within 30 days, as this could trigger a wash sale rule and negate the tax benefits of the strategy.

6. Cut Losses  
Investing in stocks can be unpredictable; sometimes, they can decrease in value. To avoid losing too much money, limiting how much you're willing to lose is a good idea. 

For instance, if your stock drops by 15-20% from the price you bought it, it might be time to sell it and cut your losses. Doing so can help you protect your investment funds for better opportunities in the future.

7. Meet Return Expectations
When assessing your investment strategy, evaluating whether an extended holding period is still a realistic approach to achieving your targeted yearly return expectations is important. 

While it may have been a valid strategy in the past, changes in market conditions or other factors may make it less feasible now. It is also important to consider the potential risks and benefits of locking in ample cumulative gains, even if they fall short of your original longer-term assumptions. 

Taking a closer look at these factors can help you make informed decisions about your investment portfolio and ensure that you're on track to meet your financial goals.

Additional Guidance for Selling Decisions

1. Maintain reasonable return expectations: Certain stocks may continue surpassing benchmarks year after year. However, most holdings likely will not consistently deliver 20%+ returns over the long haul. 

Have realistic assumptions that align with historical averages in the high single digits to low double digits. That allows riding out typical volatility and extended up and down price swings.

2. Remember your time horizon: Making quick sales to gain short-term profits goes against strategies that have been shown to build wealth over many years. It's important to avoid making impulsive decisions based on daily market changes or temporary events.

3. Review portfolio diversity: Concentrated positions that comprise an outsized chunk of holdings tend to ratchet up risk and vulnerability. Maintain balanced diversity across sectors, geographies, market caps and investment strategies. That generally supports staying invested through interim drops and market corrections.

4. Consider tax impacts: Taxable investment accounts bear capital gains taxes owed on profitable sales, which directly reduces your net return. Weigh that into any decision to sell if gains push you into a higher tax bracket. Strategic loss harvesting and charitable gifting can help mitigate taxes.

5. Don't take dialogue too literally: Company executives often preach holding for the ultra long-term during market dips and corrections. Consider that messaging aims to reassure anxious investors and temper panic selling. Make measured selling decisions aligning with your timeline. 

Common Mistakes to Avoid When Selling Stocks 

1. Selling Just Because the Stock Price Increased
Investing in stocks makes it natural to feel like selling them after they have gained a lot of value. However, it is only sometimes wise to do so. 

It is important to hold on to good quality stocks that have the potential to grow even further, even if their current value looks profitable on paper. 

These stocks should remain a part of your investment portfolio for the long term.

2. Panic Selling After a Decline 
When the stock prices fall for a short period, it doesn't necessarily mean that you should sell them. Sometimes, it's just a temporary situation that can lead to great buying opportunities. 

As long as the company's fundamentals remain strong, there's no need to panic and sell your good stocks. So, don't let the market's mood swings affect your investment decisions.

3. Selling Based on Short-Term Predictions
The news channels often discuss recessions, market corrections, and other scary financial terms to grab our attention. But these temporary concerns don't usually affect our long-term investment returns. 

In fact, selling our investments based on short-term worries can actually hurt our finances in the long run.

4. Letting Taxes Drive Investment Decisions
Selling good stocks to save on taxes can end up hurting your investment. It's important to keep taxes in mind, but you shouldn't make sell decisions based solely on that. Instead, focus on the quality of the stocks you own.

Conclusion
There is certainly no one-size-fits-all strategy to know the best time to sell a stock across all market conditions and personal contexts. However, the guidelines above should significantly increase clarity for most common scenarios.

Remember, patience itself can be a winning virtue in equity investing rather than reacting to daily noise and volatility. Stick to your well-researched investment rationale and profit-booking strategies.