At GoldBean, we advocate a buy and hold strategy. It has been proven, that over the long run, buying solid investments and holding them for the long-term is the best way to make money in the stock market.
We’ve written about when it’s time to buy. Today, we’re writing about when it’s time to sell.
Many investors don’t actually have a sell strategy. Often it’s left to a “gut check”. But selling is not an automatic reaction when a stock goes down. Usually when people buy a investment, it is done with conviction, so it is hard to break with that conviction and sell. Unfortunately when your gut finally kicks in, it may be too late.
So, don’t rely on your gut. Try to build a stock-selling strategy.
Let’s take a look at two times to sell a stock: on the way up and on the way down.
When a stock is up, it is sometimes good to sell. For example, you can sell to lock in profits that can be used for other investments. Or maybe your winning stock is now taking a huge portion of your portfolio, and you need to sell a portion to re-balance your portfolio (balance = not keeping all of your eggs in one basket).
Either way, selling a stock can be good way to lock in earnings. Just remember that you’ll have to pay tax on the gains so try to hold investments for at least a year to minimize your tax!
Selling a stock on the way down is a bit harder to do.
At GoldBean, we try to help you with this. Our GoldBean score gives you an indication about a company’s health. If the score starts drifting down, that indicates that the company’s fundamentals are weakening. This is a good signal that a company has issues.
For these companies you should ask yourself three questions: What attracted me to this stock? Have those qualities changed? Would you still buy the company today?
So, has this company has hit its peak, and the only way to go is down? (What’s next, Apple? $AAPL). Or maybe these problems are just the tip of the iceberg (Remember Blackberry? $BBY). Or maybe it’s just a one-off event (fingers crossed, Chipotle! $CMG)
Selling a stock can feel hard. But it is a necessary process. When you own a stock, always keep an eye out for sell signals. And be critical of the stocks you own. Watch for threats and weakness for your companies and how management responds. And when you’re up, always think about how you’re going to time your exit. Cashing in (and reinvesting the gains of course) can be a terrific reward!