Knowing when to sell a stock is key to financial success. One very popular investment mantra is “buying low and selling high.” However, one thing that we don’t know for a fact is the time factor between these two events. How do you know when it is time to drop a failing stock?
How do you know if it’s time to give up on a stock? While nobody would be able to make this decision for you, there are tips that would give you a pointer of when it is time to sell some stocks from your portfolio.
- You Now Have New Information
We cannot discountenance the importance of new information. It is possible that when you purchased a few stocks, you did them based on some things that were not valid or information that is no longer true.
Revisit the stock and see if it is still a good decision. In other words, for every stock that is being held, you must be able to tell why. Another reason is that you don’t understand the investment.
You might have invested blindly before, but you can’t continue like that if you don’t understand it. Determine if the investment is still in line with your overall objective as well. If it isn’t, you might need to discard it.
- Poor Management
This is only a reason to sell in extreme circumstances. If the management of a company has shown that they are of questionable character in their dealings, then you might want to cut your losses so you don’t crash along with it.
If the management of a company are swindlers, the potential of the company would not matter as it is only a matter of time before they drag you with them.
- When You Need The Money Soon
As basic as this reason seems, there is no point pretending that it doesn’t matter. If you have run into financial difficulty or you believe you would need the money in the next two to three years, holding would only have you wishing and hoping that the investment would pay off when you are ready to pull out.
- When You Need To Rebalance Your Portfolio
There would come a time when you would need to rebalance your portfolio. You might have invested too much in specific stocks and are now overweight in those stocks or in a particular industry. You might need to shed them off in order not to be prone to the risk of crashing your entire portfolio is those stocks fail.
- Reducing Stock Exposure:
As you get older — specifically, as you get closer to retirement — it’s smart to gradually reduce your exposure to stocks. While stocks have excellent long-term return potential, they are also volatile, and capital preservation becomes more important as you near retirement age. One popular rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio that should be invested in stocks. If it’s been a few years since you’ve adjusted your asset allocation, it can be a smart idea to sell some of your stock holdings.
- Failure of the industry/New Competition
The outlook of the entire industry or the availability of new competition is another thing you might need to look out for as well. If there is a new competitor that you believe would take on the market share of the company you had invested in, so much so that its profitability is now threatened, then you should also leave when you can.
Also, if the industry seems to be failing – for example, an industry going extinct like how computers phased away typewriters, then there’s no point crashing along with it.
- You See A Better Opportunity To Invest Elsewhere
In a perfect world, you’d always have spare cash to invest every time you identify an attractive investment opportunity.
In other words, sometimes you have a great investment, but notice an even better opportunity. That can be a perfectly valid reason to sell a stock.
- The Company Is Heavily Leveraged (Rising Debt)
There are a number of indicators of a failing business that you can pick from its financial statement. One of the easiest to notice is its dependence on debt. If its debt to equity ratio is too high and increasing, it might not be an indicator that it is crashing.
It means it isn’t able to make enough revenue or investment to handle its operations or even grow.
If you fall into any of these scenerios, dropping stocks might be the best option forward.
