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  • Writer's pictureJohn J. Diak, CFP®

When Should You Sell an Investment?

When Should You Sell an Investment

Buying appropriate securities is only half the story of sound investing. It is also important to be able to "read the signs" and know when it is the right time to sell.

Effective portfolio management is about more than buying securities, it's also about selling them when the time is right. Unfortunately, there's no crystal ball that tells investors when to sell their investments. Many investors hold securities for too long and reproach themselves for not having sold sooner. Others sell too soon and second-guess their chances of having done better. Psychology -- and human nature -- aside, there are some practical selling strategies you may want to consider when managing your portfolio.

Exit Strategies: When to Sell

Sell -- if your investment's value shifts by a predetermined percentage. When a security is purchased, define the maximum price movement up or down before you'll sell. If the value rises, your maximum upside number becomes an automatic signal to take profits. If the value drops, your "stop-loss point" on the low side is a fail-safe for limiting losses and protecting some part of any gains. For example, the stop-loss point could initially be set between 80% and 90% of the purchase price. If the investment's price later rises, the stop-loss point might be raised to maintain the same margin below the current price.

You can put in a stop-loss order at a given percentage below the purchase price when you buy the stock, or you can make a note in your records. The main point is to take action when your stock is losing money.

Sell -- if your investment is not meeting your objective. Why did you buy a security? Use that objective to set a reason for selling. For example, if you invested because of a stock's short-term growth potential, resolve to sell if its price stalls, unless you believe the problem is temporary.

Sell -- if you reach your goal. What was your long-term goal when you bought? For example, maybe it was to fund a child's college education and, after several years, you now have enough invested to pay for college. Instead of waiting until your child's high school graduation, reaching your goal could be your signal to sell.

Sell -- if a market trend warns you. A cyclical stock nears a historic high. A company's business suffers an unforeseen reverse. Or its stock may drop significantly while similar stocks are steady. You might resolve to sell whenever a negative trend becomes clear.

These are some of the key factors that should influence your decision to sell an investment. But don't make the decision hastily or without considering the opinion of a trusted financial professional.

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