Like the pot of gold at the end of a rainbow, sometimes it can feel like you might never actually see the profits on your investments. Fortunately, returns aren’t just a myth — and you don’t need to be extra lucky to get them.
As an investor, you likely put a lot of energy into setting goals, building a strategy, and picking the right investments — though you might not have given much thought to the process of when and how to actually sell your stocks. You know investing is all about making money in the long run, but how do you know when it’s time to actually cash in? Especially with the fear that selling now could mean missing out on gains next month (or even tomorrow)?
With patience, strategic reasoning, and thoughtful planning, you can sell stocks to take profits, reinvest your returns, or limit your losses.
Be strategic, not emotional, when deciding to sell.
It’s not a secret that investing in the stock market can drum up emotion. For some, the fear of losing money causes them to be overly cautious. For others, the desire to make more money can lead them to make choices that don’t always make the most sense.
When it comes to selling stocks, it’s critical to remove as much emotion as possible. Decisions driven by feelings are typically irrational and can lead to unrealized gains or more losses than you bargained for. So instead of hastily making a judgement call because a news headline has you fearing that the value will drop dramatically in the near future, consider the following to help determine when and why it could be the right time for you to sell stocks.
1. The reason you bought it no longer applies.
When you invest in a particular stock, you likely have a reason for doing so. Perhaps it pays monthly dividends and is a valuable addition to your income portfolio. Or maybe you chose this certain stock because in the past it has grown an average 15 to 25% annually. You may have even picked a stock as part of an ESG (environmental, social, and corporate governance) investment strategy because the company has long been committed to protecting wetlands.
Of course, things can change and it’s possible that over time, the reason you invested in a stock no longer exists. An organization may change its policies, get new management, or be overshadowed by competitors. Companies might lose revenue or decline in value. If these changes disrupt your strategy — for example, that dividend-paying stock mentioned above eliminates its dividends — you might want to consider selling the security, and potentially replacing it with another.
2. You are reallocating your portfolio.
Rebalancing your portfolio should be a standard practice for all self-directed traders. It helps you maintain your desired asset allocation between investment types like stocks and bonds based on your risk tolerance. (If you use a robo-advisor, like our Managed Portfolios, to invest, rebalancing is done for you.)
As your appetite for risk evolves throughout your life, you might sell stocks and/or other securities to adjust your asset allocation. For example, if you’re shifting from a growth-focused portfolio to an income-based strategy, you might sell a percentage of your stocks and reallocate those investments to dividend-paying bonds.
Through reviewing (and rebalancing) your assets periodically, you can also maintain your risk exposure by ensuring you aren’t too heavily invested in a single security — which can mean you’re relying disproportionately on the success of one company. Say you invest 5% of your portfolio in a tech startup you heard is poised to become the next Apple. In five years, the company has exploded, and the shares now account for 25% of your investments. You don’t want a quarter of your portfolio to rely on that one stock, in case it loses value suddenly, so you might sell a portion of your shares and reinvest the proceeds elsewhere. .
Similarly, you might have a stock that is performing poorly. It’s caused your portfolio to become imbalanced, plus you want to minimize your losses. You might decide to sell your shares and reinvest in something else to maintain your optimal risk tolerance.
3. You need money based on your financial situation.
Stocks are an asset — and in the end, it’s your money to spend. If you are planning to use your investments to help supplement a down payment on a home, pay for your kid’s tuition, or finally open the boutique you’ve been dreaming of, that can certainly be a reason to sell stocks.
In a scenario like one of these, you will likely want to plan ahead and remove your money from the stock market to coincide with when you will need it. For instance, as soon as you get pre-approved for your mortgage, or when your teen enters high school.
While you may feel like your investment could gain value if you leave it for just one more month, there’s possibility it could decline — and taking that risk could be far more detrimental than possibly upping your potential gains.
Selling Your Stock
Keep in mind: Before you sell your securities, especially if you’re making major changes to your portfolio or are unsure of the tax implications, you may consider speaking with a financial advisor or tax professional.
Once you’ve made the decision to sell stock — after reviewing your portfolio, assessing your financial situation, and checking your emotions — now’s the time to place the order. Just like when you purchase a stock through a broker, like Ally Invest, you’ll see several options for the types of orders. Here’s what you should know about each.
Market: Choosing a market order means your stock will be sold as soon as possible, for the best available price.
Limit: A limit order means your stock will only be sold at a specific price or better. So, if the stock is selling at a price less than what you want, you’ll hold on to it until it sells for your specified price (or more).
Stop: AKA a stop-loss, this is a market order that is executed only if the share price falls below a certain price. It’s meant to limit your losses.
Stop Limit: This kind of order combines limit orders and stop-loss orders. So, you give your order both a floor and a ceiling. Your order will only be executed if the price falls below your stop price, but is still at or above your limit.
The goal of investing is to reach that proverbial pot of gold at the end of the market rainbow and make profits over time. It can be easy to hold onto a stock forever or hastily make trades based on the feelings that arise when you see a stock soar or plummet — but try not to let your emotions play tricks on you. Remember that in the long run, the market tends to increase, and making the decision to sell stocks should be made strategically and thoughtfully.