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When Do I Sell a Stock?

I meet a lot of investors when I travel the country, speaking at various financial events, and the one challenge that most investors face is “when do I sell?” Our contributors to the Digests tell me they are often asked the same questions. We all find it easy to pull...

I meet a lot of investors when I travel the country, speaking at various financial events, and the one challenge that most investors face is “when do I sell?” Our contributors to the Digests tell me they are often asked the same questions. We all find it easy to pull the “buy” trigger, as buying investments is exciting, and filled with anticipation of “sugarplums dancing in our heads”—or what we like to call great gains!

Every advisor has his or her own method of deciding when to sell a stock. But over my years of investing—biased toward the long-term—I’ve found the one sure way to take emotions out of the picture and build a disciplined approach to portfolio management is setting a price target the day you purchase a stock. That way, you have a defined exit point. And I’ve written an article to show you just how to do that.

Of course, we all know that not every one of our investments will be a winner, so there are other catalysts that should prompt a sale. I can’t say it any better than Peter Lynch, the renowned mutual fund manager who turned a $1,000 investment in the Fidelity Magellan fund in 1977 into $28,000 by 1990. He has often cited his primary reasons for selling an investment:

• If the fundamentals of the company have deteriorated

• If its price-earnings ratio goes too far beyond the normal range for the company (in either direction)

• Toward the end of the cycle with a cyclical stock

• After a turnaround has been completed

• At the end of the second phase of rapid growth

• If you are holding a stock you bought as an asset play, wait for raider to come in and pay you a premium, then sell

And I agree. If your stock doesn’t fall into any of the above categories, I would put it through these last three tests:

1. Are all the reasons I originally bought this stock still in place?

2. Is my price target still valid?

3. Can I make more money retaining the stock than by substituting another investment

If the answer to any of those questions is no, it’s time to bail, and go on to investments with greater potential.

If you are still happy with the company and satisfied with its potential, then keep the stock. If not, sell it and look for greener pastures.

Take some time to review your portfolio. Once you’ve selected the stocks you may sell, you’ll want to consider the tax implications. In my next post, I’ll discuss tax-loss selling, and how that may lessen the pain from exiting some of your positions, by reducing your taxes.

See you soon!

Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with MoneyShow.com for many years as an editor and interviewer for their on-site video studios.