Small Talk

When To Sell

A monkey or a thrown dart can get you into a trade.  It's the exit that really counts!  When you hear the latest stock tip, you rarely think about when to get out; it's the getting in a stock that everyone focuses on. Here are eight Brief thoughts on "when to sell."

When You Need Money

A perfectly valid reason to sell stocks is "needing the money." There are as many reasons to need money as there are people, of course.

The problem, however, is when your need comes at a time when the market is unfavorable. When that happens, you may sell, and feel miserable as the stock continues to rise after you sell. Everyone's been through it.

The real lesson, if you have to sell because you need money, is not to invest money that you soon will need. You have to be able to separate living expenses from investments. It's the difference between money and capital.

When You Think It Is Ahead of Itself

Another perfectly valid reason for selling is when you think the stock has simply gotten more valuable than it really should be. This is often a hard determination to make, as many companies continue to grow and perform after they are "ahead of themselves." If you want to hold the stock for the long-term, selling when the stock is ahead of itself often means you forget to buy back in when the stock is more properly valued. They rarely become "cheap" once they've gotten ahead of themselves, unless they collapse.

Unfortunately, for many of us, the realization that a stock is "ahead of itself" comes long after the stock has already peaked, and fallen.

When It Doubles

An old adage in the market is that you should sell half your holdings when a stock doubles.

This is a purely emotional reason to sell a stock. But for many, it works. It allows you to feel like you have received all of your money back and that the money you now have in the market is "house money."

The concept of "house money" is purely emotional. It is always all yours.

But if selling half makes it easier for you to hold long term, which was your goal in the first place, then sell half when your initial position doubles.

When Your Nerves Can't Take It Anymore

Let's face it. Sometimes you buy a stock that takes you for an emotional ride.

Instead of increasing in value in a slow steady rise, the price dips and bounces and every night you can hardly believe how much your holdings have swung in value. Maybe you can't sleep.

If holding the stock makes you so uncomfortable that you can't think about reasons why the stock will move one way or the other, and you only think about how many dollars are lost or won in a single day, you are being distracted.

When that's the case, consider holding less volatile stocks. Know yourself. Don't hold stocks that you can't hold comfortably.

When You Reach Long-Term Capital Gains

Stocks held for more than one year are eligible for long-term capital gain treatment. This preferential treatment taxes gains at 20% (or 10% if your income is in the 15% bracket), far lower than income tax rates (these figures are as of early 2001 and may, of course, change).

On the day your holdings become long-term, your return instantly jumps by approximately one-third. If your gains are $100, your after-tax gains become $80, instead of $65.

If you decide you want to sell a stock, and you are very near the one year holding period, it's often worth waiting until you reach the long-term holding day.

Then sell.

When You Find Something Better

Another perfectly valid reason to sell is when you find a better investment.

Perhaps the risk/reward ratio is more favorable, or you just understand the new investment more deeply. When this happens, there is nothing wrong with selling your current holdings, even if you still feel positive about the stock. You just found something better, that's all.

It isn't like dumping your current "significant other" for "someone better." That practice is frowned on in relationships, but is often rewarded in the market.

When You Lose Faith

Things don't always work out. Sometimes, you are just plain wrong. When it finally dawns on you that you did make a mistake, it is best to sell, regardless of how much money you lost. Holding on to a position simply to recover your initial capital is usually a recipe for even greater losses.

When Your Premise Is Fulfilled

This is what it's all about: picking a stock because of a reasoned, well-thought investment premise, and things work out exactly like you expected, or better. When this happens you have every right to feel smart and take your profits.

But, as you can see, it isn't the only reason to sell. And you shouldn't feel like selling for some other reason is failure. The other reasons are valid also.