4 times when you should consider selling a stock

 ·7 Apr 2024

Deciding when to sell a stock is something both professional and retail investors grapple with, but PSG Wealth says there are definitely times when you should consider selling a stock.

“Warren Buffet is known for holding onto stocks for a long time, even indefinitely. However, there are valid reasons for selling a stock, and both professional and retail investors often struggle with this decision,” said Wendy Myers, the Head of Securities at PSG Wealth.

Due to the psychological influence of greed and fear, it is generally easier for investors to buy stocks than to sell them.

Nevertheless, selling stocks is an important part of the investment process, and it is important to understand the right and wrong reasons for doing so.

There are four general times when you should consider selling your stock, as outlined by Myers:

1. An investment outlook or strategy has changed.

Consider, as an example, a scenario in which you have bought into a retail company, but the economic environment has changed, so inflation is increasing.

In this case, you may decide to limit your exposure to retail shares as a result.

2. A decrease in company growth sales

If a company’s sales growth has notably slowed or its strategic direction, management, or dividend policy has changed, this indicates a key sell signal for many investors.

3. Company acquisition

When news of a company acquisition breaks, the share price of the company being acquired usually surges close to the agreed purchase price.

With limited room for further gains, investors might prefer to secure their profits soon after the acquisition announcement, especially if they anticipate potential impacts on the investment’s future appeal or strategic direction.

4. Rebalancing your portfolio

The need for investors to rebalance their portfolio ensures exposure across sectors and asset classes is maintained in accordance with your investment strategy. For example, selling a stock if you want to increase your exposure to ETFs or fixed income.

Another example of rebalancing is where a single holding becomes too big when considering your overall portfolio. This could be due to the value of the share increasing materially over time, resulting in concentration risk, which could, in turn, justify taking profits.

Despite these guidelines, choosing the opportune time to sell is never easy. When selling a stock, you are effectively giving up further equity upside, so ensure that you are comfortable living with share price moves after you have sold.

Also, ensure you are selling the stock in the context of your financial plan, which outlines your investment and financial goals for the short and long term.

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