When an author begins a new book they already know the ending. Its the ultimate goal that all of their characters are working toward and guides their actions as the story unfolds. Similarly, in investing, knowing the end of the story helps you to make smart choices along the way. For most of us, that ending will be selling off our assets in order to retire comfortably or meet another life goal. Diving when the time is right can be tricky. When is the right time to sell a stock?
Beyond that old advice of buy low and sell high, there has to be a more nuanced approach, right? Just hearing that saying might bring an image to mind of frenzied people making quick sales in hopes of cashing in. And that certainly is one way to do things. When you make stock purchases and flip them by selling them off quicklywithin hours or even minutes!this is day trading. Day trading required a laser focus on trends and data and is a full-time, pay attention to every detail to make a buck kind of thing.
It’s a challenge to turn a profit through day trading, and although every day trader believes they can make money, most people who attempt day trading end up with a net loss.
One reason that day traders might lose money is the lack of a solid strategy. Just looking at a chart of historical stock price data is not an effective way to create a successful plan. If you develop a strong strategy, it can be used in any market condition.
If youre not interested in taking on the monumental task of learning a new discipline that requires time spent practicing and gaining enough experience to become consistently profitable with trades, youre left with another option: Long-term investing.
Long-term investing is an entirely different mindset from day trading. Instead of a quick sprint where youll hope to make some money, its the marathon of staying investing and riding the gentle lift of the market over time. On average, the market has returned 10% to its investors who are well-diversified.
The overall rising of the market paired with the magic of compound interest can grow your nest egg. Compound interest is money earned on your initial investment and the interest they generate. For example, if you start with $10,000 and earn 7% interest, youll have $10,700 a the end of year one. The next year, interest accumulates based on that $10,700 total. Youll have $11,449 at the end of year two, and so on and so on for however long youre invested.
Compounding interest is one of the best reasons to invest early and often. This calculator shows the magic of regular returns. A person who invests $250 per month for 30 years will have more than $283,000. A person who invests that same amount for half the time will have just $75,000. The magic of compounding!
The value of leaving your money where it sits exists, but that doesnt mean you need to take a “set it and forget it” approach. Even long-term investors will want to clean up their portfolio from time to time, which could involve selling off or reducing some of their positions in certain industries or asset classes.
Theres not a one size fits all approach to investing, and certainly, your lifestyle and goals will change over time. The investment approach that works for you in your twenties may not hold true in your forties. Its considered best practice to review your holdings and performance every 6 to 12 months. When a professional portfolio manager does this its called a rebalance and its a necessary part of the job.
Part of your regular review, your own personal rebalance, may reveal that you need to make some changes that include selling off stocks.
When is the right time to sell a stock?
There are several clear signs that its time to unload a stock:
Its become overvalued
Overvalued and undervalued are two opposite terms. If the market price of a stock is greater then the intrinsic value of the stock then it is overvalued, while if the market price of the stock is less then the intrinsic value of the stock the then it is undervalued. One of the key strategies in long-term, or value, investing is finding stocks that are undervalued by the market. When this no longer holds true, the stock has reached its full value then its time to sell. This change in value might happen quickly, or over a long period. Staying up to date and connected to the market will help you make these determinations.
The business is changing
There is so much transparency in the market and leadership changes often make headline news. If a company that youre invested in is making big changes, that could mean that you also need to switch things up. A change in leadership can alter the long-term prospects of the stock. Leadership style, strategy, and vision can bring new life to a company; but it may also damage it.
The business is failing
The numbers dont lie and the quarterly earnings reports legally required of every public company are the one hard truth that cannot be ignored. Although any company can have a bad quarter or two, if it is repeatedly failing to meet expectations, thats probably a sign that its time for you to move on. Calculating a companys P/E ratio will help you here. You find a P/E ratio by dividing a stocks share price by the earnings per share, or EPS, which is simply the total net profits from the last year divided by the total number of outstanding shares.
You made a mistake
It happens. Just because you have invested time and money doesnt mean you shouldnt cut your losses. It can be difficult psychologically to let go of an underperforming stock, but holding on to hope when all signs point to the contrary might not be the most intelligent move. Just because youve already spent time and money doesnt mean you have to keep doing it. The point is to make money, not satisfy your ego.
When is the wrong time to sell a stock?
Panic-selling an otherwise strong stock because of a short-term drop is not a strategy for long-term success in the markets. One of the most common mistakes made by investors is refusing to sell losing stocks in hopes that the prices will recover and save their investment from a loss. So how do you know when its not the right time to sell?
When its due to fear or greed
Warren Buffett said it best: Be fearful when others are greedy, and greedy when others are fearful. If the market is trending downward, selling may not be the best move. As counterintuitive as it sounds, doubling down and buying more may be the right thing to do. Remember that historically what does down comes up again and buying when things are low ensures you catch that upswing.
When its too soon to tell
Theres something called the “8-Week Rule” and it goes like this: if a stock breaks out of the range that it’s been trading in for a while and gains 20% or more in three weeks or less, you should hold for at least eight weeks. Basically, you sit on a stock even when others are selling in order to benefit from that upward momentum.
The bottom line
Dont try to time the market. The time youre invested in the market generally beats trying to make a quick buck in the market. By engaging with your portfolio holdings you will make yourself aware of changes that could impact your strategy. Investing platforms like Public can educate you in all matters of investing via a social experience where it’s easy to exchange ideas with other investors.