Knowing when to sell stock and when to hold for longer periods is the difference between making more money as an investor and losing out on long-term returns

Knowing when to sell stocks is the hardest part of investing. Because of that, you’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established, profit-making, reputable businesses.

You can then make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.

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Look for these three important details as part of knowing when to sell stock

Investors often ask, “When do I sell?” There is no simple, fits-on-a-t-shirt answer. But there are several things that should not, in and of themselves, prompt you to sell.

• Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.
• Strikes: A single workers’ strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and a good reason to sell.
• Environmental, regulatory or anti-trust problems: These laws are complicated and constantly evolving through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.

Hold on to your stocks to realize the biggest benefits of your conservative investments

In any bull market, conservative investors often wind up selling their best stocks way too early. Often, they do so because their stocks seem to have gone up “too far, too fast,” or because “I can buy it back on a dip,” or because “they’re no longer cheap.” These are all bad reasons to sell.

There’s a large random element in all stock price changes. When it seems to you that stocks have gone up “too far, too fast,” it may mean you’re mistaken about how far or fast they should go up. You may be unaware of good things that are going on out of sight and raising their value. Perhaps these things have already happened, and the stock is going up as the news spreads.

In a secular bull market, “they’re no longer cheap” is a particularly insidious rationale for selling. As we’ve mentioned, most stocks are cheap at the start of a secular bull market. As time passes and the rise continues, investors get more confident. A virtuous circle develops. Investors are willing to pay ever higher prices for earnings, sales and improving prospects, and this leads to higher levels of earnings, sales and prospects, pushing investor confidence and stock prices higher still. Eventually the fun ends, of course, but conservative investors tend to underestimate how long it can last.

If you sell when stocks are simply “no longer cheap” (or are “fully priced,” as a broker might put it), you will miss out on a lot of profit.

Learn why the sell-half rule can help you profit from your aggressive holdings

We routinely advise selling half of any high-risk investment you own that doubles. Selling half of hot stocks that surge helps you guard your profits. But apply this rule only to more aggressive stocks, and not to the well-established stocks that may surprise you by going a lot higher in the long run.

To succeed as an investor, you need to hold on to your best picks for lengthy periods. If you’re too quick to sell, you’ll never hold a stock that vastly outperforms the market, and you need a few of those to offset the inevitable disappointments.

Over the course of several years or decades, you’ll find that of all the stocks you own that vastly outperform the market, most were already well-established when you bought them.

It’s easy to sell too soon or too late. But you’ll limit the cost of poorly timed sales if you practice our three-pronged Successful Investor approach.

Use our Successful Investor approach to gain confidence in knowing when to sell stocks

Our “buy and watch closely” approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well. We start by applying our Successful Investor approach for portfolio construction:

• Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
• Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
• Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.

What signs do you look for to indicate that it’s time to sell a stock?