When to Sell StockKnowing when to sell stock is as important as anything else you do in investing. While there are no hard and fast rules, there are some general guidelines that investors can use to apply some logic to their investment decisions. And this is the key. All too often, investors make major decisions based on fleeting emotions. That's why people sell when the stock market is crashing. This creates a panic mentality that's contagious and drives share prices down even further. When thinking about when to sell stock, begin by making a commitment to avoid falling into this trap. As smart investors we want to make sound investing decisions and buy or sell for good reasons, rather than falling prey to hype, temporary ups and downs in the market, or panic. With that in mind, lets go through some reasons for parting with an investment. An investment has met its goalsAt the beginning of an investment you should set concrete financial goals. The goals should be realistic of course, but it really doesn't matter what they are as long as you're planning ahead and setting them. Here are a couple of examples that demonstrate how you could set financial goals.Maybe you buy $10,000 of Apple stock, with the hope that it will grow to $25,000 at some point down the road. That may or may not be realistic at the time you bought the stock. But, a smart investor will also set a time limit. So you might say that you're going to give it 5 years. At the 5 year point, if the stock has met or exceeded your goal, then this is a good reason to sell the stock. After all, the ultimate reason for investing in the stock market is to get cash out. So you have to plan your investments and be as willing to sell as to buy when you meet your goals. A smart investor could sell the stock and get the $25,000. Then take $15,000 cash out, and re-invest the original $10,000. It doesn't matter how you frame your goals. For example, you might say you want your investment to grow 50% instead of stating the dollar amount. The point is don't invest "on the fly" and "hope for the best". Before you buy a stock, decide what it's going to do for you, how long you're going to give it to work, and be ready to exit once that date is reached. An investment just isn't workingLet's say you sink $10,000 in Acme Industries hoping your investment will grow to $15,000 in 3 years. But Acme falls on tough times and loses some market share because their biggest competitor has introduced a new widget that people love. After 3 years, the stock is valued at $9,000.Knowing when to sell stock also means understanding that despite your best hopes, and investment isn't working out for you. Again, they key to smart investing is not being overwhelmed by emotions. Don't play the stock market like a gambling casino and expect solid, consistent results. Part of this means avoiding being emotional. In this case, at the end of the 3 years if you really believe in the company you might be tempted to hang on, thinking a turn-around is just around the corner. Investors hate to miss out on something, so this pull might be strong. No matter how strong the pull, if your investment fails to meet your goals its time to get out. Maintaining Your Asset AllocationA smart investor will plan ahead and set up a given asset allocation. Maybe your stock market investments are split up in the following way (a hypothetical example just to make a point):- 50% in the S & P 500- 20% in emerging market funds- 10% in technology stocks- 10% in healthcare stocks- 10% in small cap growth funds Over a period of 3 years, growth in China and India sky rockets. Now your emerging market funds take up 30% of your portfolio. The emotional investor will let that slide and may even sink more money into the emerging market funds. But that isn't what a smart investor will do. You set up your original asset allocation based on your financial goals and how much risk you're willing to assume. You should stick to that plan. Emerging markets are very high risk, you're bound to lose money as fast as you make it. Part of knowing when to sell stock is building a precise asset allocation and maintaining it. In this case, you can sell of your emerging market funds and buy in your other investments until your percentages return to your original allocation. Not everybody invests this way of course, but its a good strategy.
Overvalued StockStudy the price to earnings ratio (P/E) and PEG ratio for each stock in your portfolio. Knowing when to sell stock often means unloading shares that are overpriced. Remember the internet bubble? At one point AOL stock had a ridiculous P/E that was in the 400's. People being guided by hysteria continued to buy up AOL stock, just on the basis of the price going up forever even though AOL was not increasing their earnings to keep up. We all know what happened, bubbles burst and people ended up losing their shirts in the internet bubble crash.A smart investor will be keeping a keen eye on these trends and know when to get out.
Fundamentals Don't Look GoodKnowing when to sell stock not only means paying attention to the share price, but also to how a company is doing in general.A good rule of thumb is to give a company 3 years to get on track. If at the end of that period, the company fundamentals don't look good-its sales are down, its taking on too much debt and so on, it may be time to sell the stock.
Market TimingSome investors use a market timing strategy to protect their assets. In a nutshell this means getting in and out of the stock market at the right time to avoid crashes that could eat up your cash. If this investing strategy works good for you, knowing when to sell stock which in this case could mean selling all your stocks and moving into cash and bonds, is an important part of your overall investment strategy.Personal NeedFinally, of course, there is personal need. Don't forget you've got cash tied up in the stock market and if you have an emergency and need cold, hard, cash, you can always sell stock to get it. Knowing when to sell stock can be as simple as being ready to part with it if you have a medical of financial emergency, knowing you can get back in the market later when things are better.
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