Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “Selling your stock market picks costs money, and that’s why successful investors do it as little as possible.”

Investors often ask, “When should I sell my stocks? If I sell now, I’ll nail down big profits. But I’ll have to pay heavy capital gains taxes.”

The answer is different for every stock. The general rule: you should be eager to sell speculative stock market picks, because their successes may not last. But you should be reluctant to sell high-quality stocks that have a well-established business with a history of profit and, better yet, dividends. That’s because these stocks should make up the bulk of your portfolio.

Here are three reasons why you might want to sell a prosperous, well-established dividend-paying stock.

• The company’s outlook has deteriorated. It has taken on major projects that appear headed for failure. Or, it shows signs of bad management or lasting external difficulties that will cut into earnings. Or it has borrowed heavily, perhaps to make itself unattractive to companies that might have wanted to bid for it.

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• The market outlook has deteriorated. You would, of course, sell if you knew the market was headed for a broad setback that could go on for a year or two, or possibly longer. However, market declines like these are rare and hard to predict. At any given time, somebody is predicting that a market decline like this or worse is just around the corner. Most of these predictions turn out wrong.
• Your circumstances have changed. You need cash now more than you need future growth or dividends. Or you have retired or lost your job, and you need to cut your investment risk by selling some stocks. This is usually your soundest reason for selling a high-quality stock.

Remember, selling costs money. You have to pay brokerage commissions. You also lose money to the bid-ask spread. You may have to pay taxes on gains in investments you hold outside your RRSP. To avoid these costs, invest mainly in well-established stock market picks that you might want to hold on to more or less indefinitely.

Next Wednesday, September 8, 2010, Investor Toolkit will look at how to profit from spinoffs.

You can get our investing advice, plus buy/sell/hold advice on stock market picks you may be considering buying in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.