When To Sell A Stock or Fund – A Tough Question

Knowing when to sell an investment in a stock or fund can be harder than knowing when to buy. The reason is because selling has so many of its own rules and rationalizations to consider. For example:

The type of investment account is a major consideration. Is it a 401(k) that has a limited number of investments to choose from? Is it a Roth IRA with no taxes on gains? Is it an individual account subject to short-term or long-term capital gains taxes? How much will you pay in fees by selling?

Another life event can cause you to decide to sell. Unfortunately trying to time your investments with life events such as weddings, college, buying a home, etc. can be very difficult, and depending on how much cash you are trying to raise, can have a negative impact on your investment strategy.

Volatility is a major factor in deciding when to sell. If a highly volatile investment is at or near a peak and you stand to make a nice profit by selling, then by all means do so. Don’t worry about whether it goes up or down after that. Instead either enjoy the profit or look for something else to invest in. If you have a low-volatility investment that pays dividends you may want to hold on to it in order to provide stability to your portfolio.

Gains can be looked at in many ways. Unrealized gains are the amount that your current investments have gone up in value since you invested. Realized gains are how much actual profit you have made by selling investments. Gains can be looked at as a percentage or in dollars, and of course the goal is to have your dollars in the investments that are going up by the highest percentage in the shortest amount of time. Timing of gains is also a factor. How long have you been holding on to an investment and how much has it gone up in that time? If you’ve doubled your money in a short time, it might be time to take your profits and run. Likewise if an investment is going nowhere and taking up time and money, you may want to sell it to look for something better. Which brings me to…

Opportunity Cost is the effect of holding on to an investment for too long rather than selling it in order to invest in a better opportunity. If you’ve been holding on to an investment for a long time and it seems to be going nowhere, you may want to sell (hopefully at a profit) in order to invest that money in better opportunities.

You’ve met a target price: When investing, it’s important to consider not only how much money you want to invest, but also how much you want that investment to go up over how much time. If you meet your target, by all means sell and take advantage of how smart you are. If the price continues to go up, at least you got what you wanted out of it.

Allocation is another reason to buy or sell. Assuming all else remains the same, when the value of your investments goes up, the percentage of cash in your portfolio becomes relatively lower, signaling that it may be time to sell and take some of those profits. Beyond that, an allocation strategy is used to determine the percentage of your portfolio that you want to keep in various asset classes. Again the idea is to stick to an allocation model when considering whether it’s time to buy or sell. Sell when you have made money.

Consolidation becomes a consideration as your portfolio matures. Of course we need to be diversified, but most individual investors start with a bunch of small investments and eventually move on to bigger ones. Occasionally selling your smaller investments can free up cash to make larger ones.

A merger or acquisition is often a good reason to sell. When a company is taken over, its shares generally jump in price. That is probably a good time to take the money and run as you are not likely to see such a quick jump in price again soon.

The worst case scenario – the company has gone out of business. Even in this case it’s important to sell your stock in order to realize the loss for tax purposes.

Good luck!

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