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One of the trickiest aspects of investing in the stock market is knowing when to sell. Since we aren’t Warren Buffett and our investment strategy does not match his, we must consider several aspects before selling the stocks. Here are some tips and philosophies to help guide your thinking.
When it comes to stock trading, perhaps the greatest piece of advice to remember is that it’s impossible to time the market. If anyone who buys and sells individual stocks had access to a crystal ball, they would always buy when the stock price was low and sell when they knew it had reached its peak and had no more room for growth. Of course, in the real world, the price of a stock is susceptible to fluctuations in the market, the world of business, and the global economy as a whole. As such, you’ll never be on the right side of a trade 100% of the time, and you can never rely on past performance.
That doesn’t mean there aren’t a few different concepts that can help guide your investing decisions. Unsurprisingly, long-term investors have things easy when deciding to sell off their shares because they’ve generally planned to start liquidating their assets at a specific date in the future, such as retirement.
When it comes to short-term investing, your investment decisions will be a bit more fly-by-the-seat-of-your-pants from time to time. Even so, there are some guiding principles and philosophies that can assist you in deciding whether the time is right or wrong for you to sell. Keep reading to discover a few different concepts that may help you decide if it’s a good idea or not to liquidate your investments.
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What are some philosophies to help guide your decision on when to sell?
Perhaps one of the most nerve-wracking aspects of investing in the stock market is determining whether or not it’s a good time to sell. While many people want to get out while the getting is good—so to speak—when most index funds have historically continued to appreciate over time, it may be foolhardy to sell too early.
That being said, if there’s one thing the GameStop investing fiasco has illustrated, it’s how quickly a price can swing one way or the other. Redditors who felt like they were making out like bandits when GameStop’s stock hit $300 or $400 may have been in for a rude awakening when the stock plummetted just a day or two later and they’d gotten greedy holding.
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Here are a few different concepts to think about as you decide whether it makes sense or not to sell your stock:
Take advantage of dramatic spikes
It’s easy for emotions to weigh on you in the midst of the spike of any stock. After all, FOMO can be real, and looking at stock a few hours later and realizing that you could have sold for double can make you feel as if you’ve made a mistake. While it’s understandable to feel that way, it’s just as important to recognize that as long as you’re selling at a profit, you’re making a profit. Rather than focusing on the feelings you associate with missing out on a bigger sale, keep in mind that you’ve still made it out ahead when it comes to the numbers.
Take a loss now if you realize you made a wrong move
While nobody likes to admit it, sometimes you’ll make a mistake as an investor. Whether you messed up your valuation calculation or just got more information about a company’s financials or performance, it’s better to take the loss as soon as you recognize it. In certain situations, the value of your stock could bounce back, and you might recoup your losses. Still, again, it’s better to think mathematically than emotionally and just eat the loss rather than wait for a fluctuation that may only result in your loss increasing.
Tax considerations
Tax considerations are crucial in investment decisions, including when to buy, sell, or hold stocks. You realize a capital gain when you sell a stock for more than you paid for it. Capital gains are classified as short-term or long-term, depending on how long you held the asset before selling it. Short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, which can be significantly higher than long-term capital gains tax rates. Long-term capital gains (assets held for more than one year) are typically taxed at lower rates, tied to your income level. If you have investments that have lost value, you can sell them at a loss to offset capital gains realized from other investments. This strategy, known as tax-loss harvesting, can help reduce your tax liability.
Stock dividend income is taxed differently depending on whether it's classified as qualified or ordinary dividends. Qualified dividends are subject to long-term capital gains tax rates, while ordinary dividends are taxed at ordinary income tax rates. Investing in stocks through tax-advantaged accounts such as Individual Retirement Accounts (IRAs) or 401(k) plans can provide significant tax benefits. Contributions to traditional IRAs and 401(k) plans are typically tax-deductible, and investment gains within these accounts grow tax-deferred until withdrawals are made, potentially at a lower tax rate in retirement.
Related: Best Stocks to Buy for Beginners
Know which stocks are long-term holds vs short-term options
For the most part, the only time you should be selling is if you’ve been speculating on short-term options for a few years. Long-term investors have a deadline in mind since they often use ETFs, mutual funds, and bonds to create a more retirement portfolio. Deciding which growth stocks you intend to jettison when they reach a specific value can be a helpful way to prime your mindset to sell when the time is right to strike.
Understand rebalancing
Sometimes, the best indicator that it’s time to sell a stock or buy one is because you need to rebalance your portfolio. Most investors use allocation to match the funds they’re investing in with their risk tolerance and adjust it as they age. That being said, since different securities perform differently over time, you may realize that the allocation of your investment portfolio that started at 40% bonds, 40% equities, and 20% treasury funds may now be comprised of 45% bonds, 45% equities, and only 10% treasury funds. If you’re still interested in keeping your original portfolio allocation, you’ll thus need to sell excess bonds and equities to purchase more treasury funds and rebalance.
Changes in personal circumstances
Changes in personal circumstances can significantly impact your investment decisions and overall financial planning. As retirement age approaches, your investment strategy may shift from growth-oriented to income-focused. You might consider selling stocks that are more volatile or have lower dividend yields in favor of more stable, income-generating investments like bonds or dividend-paying stocks. If you experience a significant change in your income, such as a job loss or a raise, it can affect your ability to invest and risk tolerance. Selling stocks to raise cash or reallocating your portfolio to align with your new financial situation may be necessary. Unexpected financial needs, such as medical expenses, home repairs, or educational expenses, may require liquidating some of your investments, including stocks, to cover the costs.
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The benefits of using limit orders to sell your stocks
One of the best ways to eliminate the guesswork and emotional stakes of knowing whether or not to sell or hold is to use limit orders with your brokerage. With a limit order, you can use information you’ve researched about a company’s valuation and the price to earnings you’re looking to get and factor that into the number you’d comfortably part with a stock for.
Once you’ve determined that price target, you can set up a sell order for 24 hours or up to 60 days in your brokerage account that will automatically sell all or a portion of your shares when the stock reaches a certain price. This makes it much easier to stop poring over NASDAQ and rest assured that once a company’s stock reaches the price you think is fair to sell, you do.
Costs
One thing to keep in mind when determining whether or not it’s the right time to sell your stock is that you will have different capital gains to pay on your taxes depending on when you time your sale. While one aspect of calculating your capital gains taxes has to do with your annual income, the timing of the sale and current price are just as important as the share price you purchased the stock at.
Generally speaking, capital gains will be higher if your length of ownership in the stock you’re selling is less than a year. For example, assuming you have an annual income of $50,000 and live in Chicago, if the purchase price is $100 and you sell that stock for $200 within the year you purchased it, you’ll owe $17 in capital gains taxes. However, if you hold that asset for longer than a year before selling, you would only owe $5 in capital gains taxes.
By holding any of your shares as a long-term investment, you can minimize the capital gains tax you owe when selling stocks. That being said, capital gains aren’t the only thing to consider as you figure out when the best time is to cash in on your investment. Opportunity cost is also a crucial factor to weigh. After all, the market price might see a downturn while you wait for a year to pass, which could ultimately negate the benefit of lowering your capital gain taxes in the first place by decreasing your profit.
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The bottom line
Although investing can feel very emotional and personal, it’s always best to come back to the math underpinning your investment objectives if you’re indecisive about whether to make a sale. Especially when it comes to value investing, recognizing that you’re investing in an undervalued company and calculating what you expect their stock to appreciate can be incredibly helpful in figuring out what number makes sense to you to sell at.
That being said, sometimes it’s important to cut your losses before they get even worse. For example, while investors may have thought they would be lucky to purchase stock in AMC Entertainment (AMC) during the Reddit-fueled spikes if you purchased at $13 or $15, it’s best to cut your losses before the price continues to decline. While it can sting a little to sell at a loss, it’s best to do so once you know you’ve made a mistake since waiting longer won’t do much for your pride if the price continues to crater.
If you don’t want to watch a stock’s performance like a hawk, limiting orders can be an excellent way to ensure you’re selling at the price you want and avoiding regrets. Ultimately, it becomes much easier to make investment decisions if you have a clear plan and financial goals. As beginners, it helps to read financial statements, learn technical analysis, and watch stock fundamentals. For these reasons, talking to a financial advisor can make sense once you start accumulating wealth in your portfolio. Always remember diversification is the key to achieving long-term investment goals at low risk.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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