When should I sell my stocks?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest.

Investors can be such one-sided creatures. We break out the balance sheets and charts before we buy a stock and then often ignore all logic when it comes to selling. The problem is this void is normally filled by a heady blend of worry, fear, panic or greed - not a great set of drivers, when it comes to handling our money.

So, when should you sell your stocks and how can you be sure you’re doing the right thing? Let’s dig in.

For long-only investors, focusing purely on buying stocks which hopefully rise enough to sell and bank a profit, the problem is that growth could theoretically go on forever. How can you know you’re selling at the right time if that chart could keep going up and up even after you’re out? Just as frustrating is the thought that a losing position could turn the corner just after you sell it.

We also have a niggling need to be right. It feels much better being able to talk about that positive return we made than the losing position we managed to sell before it did too much damage. It’s often why we hang onto losers and chop down the winners, hoping the red goes green in the end so we’ll keep a perfect streak of not losing money.

Sadly, letting ego in like this threatens to stymie the best performers, leaving you with a ragtag bunch of laggards. Once we realise we don’t have to get every stock pick right, and overall portfolio management is more important, the selling part can get a bit easier.

“The stock doesn’t know you own it.” Peter Lynch

Famed US investor Peter Lynch’s message here is to avoid getting attached. Stocks are simply useful implements in your investment toolkit - no more, no less. Quite often, investors like to hang onto a stock because it represents the time, effort and knowledge taken to research it. Understandable but, by itself, knowing a company inside out isn’t a reason to hang onto it. Nor is the fear of what might happen after you’ve sold it a good reason to keep it around.

In both cases, the difficulty in selling comes from our inability to tell the future and our tendency to let our emotions do the talking. Thankfully, there’s a prescription for both of these ailments.

We can do our best to avoid letting emotion take over by setting our sell criteria before we’ve even bought. It might feel like it’s too early but what prompted you to buy in the first place can be a big help.

For example, if you’re about to buy the shares of a company in distress, in the hopes of a recovery, what would that turnaround actually look like to you? Is it to do with new management changing the company’s structure, spinning off non-core departments and setting a new corporate strategy?

Maybe it’s to do with reducing debt or increasing margins? It might even be that you think the market has overreacted to bad news and you just need to wait for calmer sentiment to stabilise the share price.

In all of these instances, there is a clear outcome that you are using as a reason to buy. At the very least, whether these narratives actually play out or not will give you the chance to pause and re-evaluate your reason for staying invested. It may be it all happens as you’ve predicted, or you can see progress and are willing to hang on, or it may be that there’s been no uplift at all and an exit is worth considering.

Whatever happens and whatever you choose to do, the important thing is there are real and measurable factors driving your decision - not gut feeling or rash judgement.

Sticking to a pre-determined strategy like this means different things to different people.

For investors in high-growth companies, the road will likely be bumpy and there may be times you need to deal with higher volatility than usual - these are often world-changing companies after all. They can and do fail as well though, which is another reminder to not get dazzled by share prices - remember to look at the actual company underneath it all. How is it performing and is the firm’s growth reflected in the stock?

Share prices can get ahead of themselves in high-growth companies and it’s not always a bad thing to see shares pause for breath or come down to get back in line with earnings. If it feels like the fundamentals left the conversation a while ago and animal spirits are running the show, it might be a chance to stop and reflect.

Investors trying to buy high-quality companies for a cheap or ‘reasonable’ price and backing them for the long term are often more concerned with changes to the consistency that has built such world-leading brands.

New management coming in and putting their stamp on things by acquiring new businesses, veering off into new markets, products and services, or racking up excessive debt are all alarm bells for ‘quality-growth’ investors. And while this bunch is often known for their buy-and-hold approach to stocks, UK fund manager Nick Train emphasised a key part of Warren Buffett’s long-term strategy, saying “Ideally, the perfect holding period is forever.”

The distinction is important here. If the type of company Buffett normally looks for (predictable earnings, high quality management, low debt, sustainable competitive advantage) keeps on delivering, he’s happy to hold. If it doesn’t, or the market price doesn’t reflect the reality within the business, he’ll think about selling. It’s not about holding at all costs.

“Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.” Warren Buffett

Value contrarian investors looking in other people’s dustbins for beaten up or overlooked stocks try to find near-term catalysts that will propel their companies back into the mainstream. For this group, a firm getting back on its feet is often enough to signal a sale.

In the end, if you’ve followed your own process and can justify what you did, why you did it and when you did it, there might still be learnings to take away but you’ll know you did the right thing by your own standards.

At the very least, it makes whatever happens next for that stock a lot easier to stomach.

You could even remove yourself even further and set limit orders to sell if a stock reaches a certain peak or trough. Not only does this let you get on with your day job without having to check in regularly on the market, it also takes away any hesitancy or pressurised decision-making you might experience if you had to press ‘sell’ yourself.

Setting up a structured approach to selling, with clear signals and planned actions is as much about making a good decision for you as it is about preventing that thought of ‘what if…?’

Here are a few more prompts to help you decide if selling is the right thing to do.

• Did you make a mistake? It’s fine, we all do it. Maybe you missed something in your research or got a few growth projections wrong. It’s only a problem if you don’t deal with it so if it’s not actually the company you thought it was, it might be time to sell up and move on.
• Is there something better out there? Looking at other stocks outperforming yours in the short-term can be frustrating. While that’s no reason to jump ship, you may genuinely find a better idea than your current one without the spare cash to invest. It’s reasonable to always think about the best stocks to help you hit your financial goals, just try not to flit between stocks - after all, long-term compounding is what we’re after. Chopping and changing is a bit like constantly switching queues at the supermarket checkout, it doesn’t necessarily help you get through any quicker.
• What about your personal needs? Don’t forget the whole purpose of your investing journey is to help fulfil your financial goals. In this case, it may be useful to think about reducing risk or selling in stages before you need to hand over a big chunk of cash, like a house deposit. The last thing you need when you’ve found your forever home is for the market to dip and take your downpayment with you.

Important information

When you invest your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.

This article is meant for educational purposes only and should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice.