The question of when to sell stocks you own should focus mostly on the overall quality of the stocks
Deciding when to sell stocks is one of the trickiest parts of investing. We are programmed to run from danger, and every day the media brings new reasons to sell. But if you sell too often or too quickly, you’ll sell a lot of your best choices way too early, and you’ll never make any serious profits.
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When to sell stocks: What investors need to consider before making the decision to sell
Every case is different. However, you can start by looking at why you bought the stock in the first place.
Suppose you bought because you liked the stock’s earnings and dividend history, and you thought it had a lot of growth potential. These are markers of a high-quality stock. If a stock like that drops after you buy, you need to resist the urge to sell. Instead, update your view.
Did the stock go down because of temporary bad news, such as a single quarter of weak earnings? Or did it drop due to seemingly bad political or economic news in one of its markets? If so, was it a major or minor market?
Or, did it drop because of something more serious that could endanger the dividend and undermine its long-term potential? For instance, tech-stock investors sometimes stampede out of a stock if they hear it is falling behind its competition. That can be a serious problem. However, tech competitors sometimes leapfrog each other as they strive to improve their products.
When to sell stocks: Always use caution before selling high-quality stocks
As a rule, you should be slow to sell high-quality stocks, and quick to sell low-quality stocks. That’s because high-quality stocks make better long-term investments. They tend to recover faster from a setback, and are more likely to go on to new peaks.
It’s essential to invest the bulk of your portfolio in stocks that have some history of sales, if not profits or cash flow. If you break this rule and invest in, say, junior mines or tech startups, you should only do so if you have a high opinion of the value of the junior’s assets and/or business plan, and you buy with money you can afford to lose. After all, you could very well be mistaken about their value. Your low-quality buys might eventually wind up worthless.
When to sell stocks: Low-quality stocks have a high failure rate
Low-quality stocks are more likely to stay down, or take longer to recover.
You need to look at a stock differently if you bought it as a short-term trade or speculation. Stocks with that kind of appeal may be of lower investment quality.
Suppose you bought the stock as a way to cash in on a popular investing theme such as biotech, artificial intelligence, or solar and wind power. There’s nothing inherently wrong with that. Of course, it’s better to take that kind of gamble on a stock with a sound foundation. Stock promoters may try to lure you in by projecting a false aura of progress. If they can spur demand, after all, they’ll be able to sell their own holdings at higher prices.
Keep in mind that it’s much easier to promote a stock than to create a growing, money-making business.
You need to be especially skeptical of stocks you bought on a tip from a friend or acquaintance, especially if media coverage spurred you to lower your guard. Purchases like these should work out quickly, if at all. But if a stock fails to rise despite word-of-mouth and media promotion, it probably has limited potential. Be quick to sell if it turns downward.
There are lots of factors to consider, of course, and many grey areas.
Be particularly cautious in thinking about when to sell stocks of blue chip companies
You can cut way down on the times when you really need to sell by consistently buying well-established, high-quality stocks. These stocks can still drop sharply when the economy falters or bad news strikes, of course. But these are the stocks that snap back quickest and most reliably when the trend reverses and bad news comes less often. That’s why it generally pays to hold on to stocks like these through market setbacks. But you need to look at each case on its own, since there are exceptions.
What parameters do you use when deciding to sell a stock, and does the media’s influence play a part in your decision making?
If you stick to high-quality stocks, you generally won’t have to sell before you’re ready, but you may need to be patient with them. What high quality stocks have you sold because of a downturn?
Comments
Bill
Hanging on to a stock is OK when there is still potential to rise further or to increase its dividend HOWEVER if the stock has gone as far as it is going to go SELL before it drops NOT at the bottom. Look at Teck Resources. TSI said Buy in 2008 or 2009 when it was at or below $ 4.00 –Good Call BUT then it rose all the way to $ 62.00 plus and all the up TSI said Buy but that was as far as the stock went TSI SHOULD HAVE SAID SELL at that point. I feel sorry for those who followed TSI`s advice then and bought at that price for the price dropped like a rock all the down to around $ 30.00 and TSI called it the stock of the month or year (I forget) BUT the stock continued to drop like a rock and TSI ALWAYS said BUY all the way back down to below $ 4.00 again. TSI has never said anything except BUY with this stock. Originally I had bought in 2009 about $ 4.00 and eventually sold for a profit as I stupidly followed TSI`s advice but I could have had a 15 X profit if TSI had given proper advice. TSI`s advice with oil stocks has been similar. SELL should be at the TOP of the run NOT at the BOTTOM when all hope could be lost as the stock`s price falls into the abyss !! Now watch to see if TSI has learned anything from my post –maybe other people have said the same. I do not know.
As intended, I am using my RRIF to fund my retirement. In it I hold a variety of blue chip Canadian and US stocks, all highly rated by TSI. If TSI’s rating becomes “Hold”, that would be the first stock that I would sell. Another sell signal for me would be if a stock became more than 10% of the value of my portfolio. In that case, I would reduce it somewhat to perhaps 5 to 7% of my portfolio. I am currently automatically reinvesting dividends [DRIP] through my broker. Discontinuing that practice would generate cash but not sufficient to meet my minimum withdrawal. As the surviving spouse, whatever remains in my RRIF at my death, would be heavily taxed, probably at the maximum rate. This is however an incentive to remove stocks/cash from my RRIF in a more tax effective manner. I am really struggling with what to sell.
First, it sounds like you have built a sound portfolio—of TSI stocks (presumably balanced across the five sectors) and limiting your exposure to any one stock.
The choice of what to sell is a personal one….and there’s no particular way to remove stocks/cash in a tax-effective manner….but here are some thoughts:
It looks like you are already doing the first key steps we would recommend in narrowing down a portfolio—selling holds, or stocks we don’t recommend, and partially selling holdings above 5% or so.
If you are a conservative investor (i.e. your RRIF holdings are part of the funds you need to live on, rather than getting all you need from pensions and so on) then as a conservative or income-seeking investor, you may want to emphasize utilities and banks for their high and generally secure dividends—plus their share prices are currently down.
Beyond that, you might consider selling off any highflyers with high p/e’s, even though we still see them as buys (Nvidia for instance, or say Microsoft).
But if you are happy with your overall portfolio positioning, then maybe maintain that by selling part holdings of each of your stocks—that’s feasible given today’s low discount brokerage commissions.
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Hanging on to a stock is OK when there is still potential to rise further or to increase its dividend HOWEVER if the stock has gone as far as it is going to go SELL before it drops NOT at the bottom. Look at Teck Resources. TSI said Buy in 2008 or 2009 when it was at or below $ 4.00 –Good Call BUT then it rose all the way to $ 62.00 plus and all the up TSI said Buy but that was as far as the stock went TSI SHOULD HAVE SAID SELL at that point. I feel sorry for those who followed TSI`s advice then and bought at that price for the price dropped like a rock all the down to around $ 30.00 and TSI called it the stock of the month or year (I forget) BUT the stock continued to drop like a rock and TSI ALWAYS said BUY all the way back down to below $ 4.00 again. TSI has never said anything except BUY with this stock. Originally I had bought in 2009 about $ 4.00 and eventually sold for a profit as I stupidly followed TSI`s advice but I could have had a 15 X profit if TSI had given proper advice. TSI`s advice with oil stocks has been similar. SELL should be at the TOP of the run NOT at the BOTTOM when all hope could be lost as the stock`s price falls into the abyss !! Now watch to see if TSI has learned anything from my post –maybe other people have said the same. I do not know.
As intended, I am using my RRIF to fund my retirement. In it I hold a variety of blue chip Canadian and US stocks, all highly rated by TSI. If TSI’s rating becomes “Hold”, that would be the first stock that I would sell. Another sell signal for me would be if a stock became more than 10% of the value of my portfolio. In that case, I would reduce it somewhat to perhaps 5 to 7% of my portfolio. I am currently automatically reinvesting dividends [DRIP] through my broker. Discontinuing that practice would generate cash but not sufficient to meet my minimum withdrawal. As the surviving spouse, whatever remains in my RRIF at my death, would be heavily taxed, probably at the maximum rate. This is however an incentive to remove stocks/cash from my RRIF in a more tax effective manner. I am really struggling with what to sell.
Thanks for your questions.
First, it sounds like you have built a sound portfolio—of TSI stocks (presumably balanced across the five sectors) and limiting your exposure to any one stock.
The choice of what to sell is a personal one….and there’s no particular way to remove stocks/cash in a tax-effective manner….but here are some thoughts:
It looks like you are already doing the first key steps we would recommend in narrowing down a portfolio—selling holds, or stocks we don’t recommend, and partially selling holdings above 5% or so.
If you are a conservative investor (i.e. your RRIF holdings are part of the funds you need to live on, rather than getting all you need from pensions and so on) then as a conservative or income-seeking investor, you may want to emphasize utilities and banks for their high and generally secure dividends—plus their share prices are currently down.
Beyond that, you might consider selling off any highflyers with high p/e’s, even though we still see them as buys (Nvidia for instance, or say Microsoft).
But if you are happy with your overall portfolio positioning, then maybe maintain that by selling part holdings of each of your stocks—that’s feasible given today’s low discount brokerage commissions.