Updated: September 11, 2020
A lot of stock market advice focus on buying. They’re usually geared towards which companies are good to buy today. But seldom do you hear or read tips on when you should sell those shares.
Normally, it’s only when the market goes down do you ever hear people say that it’s time to sell. Unfortunately, those are often meant for stock traders, not investors.
If you’re invested in the stock market, then a different set of rules apply to you. Because you’re in it for the long-term, short-term market volatility shouldn’t be a reason to sell.
So what should be your reason to sell your stock investments? Here are four:
1. You hit your target price.
Never invest without a financial goal. Specifically, a number that you want to reach.
Let’s say you want to buy a house worth P3 million. Currently, you only have P1 million. So you decide to invest that amount in the stock market.
When the value of your portfolio reaches P3 million (or enough to buy that house that you want), then it’s time to sell. Yes, it’s that simple.
The reason why a lot of people don’t know when they should sell their stock investments is because they don’t have a financial goal in mind.
Having one makes selling decisions easier.
2. The company is fundamentally declining.
Nokia was the market leader for mobile phones during the 90s, and a fundamentally sound company to buy at the New York Stock Exchange back then.
However, as the new millennium came, the company failed to remain competitive as new brands took over the market. People started shifting towards Blackberries, iPhones, and Android phones.
If you had Nokia shares during that time, then that’s definitely a sign to sell your stocks.
Analyze the company. Is it growing or shrinking? If its future looks bleak, then it may be time to sell those shares before the price starts to rapidly drop.
3. You’ll need the money within the next 5 years.
Again, this is the reason why you should have a financial goal before investing. If you plan to use the money within the next five years, then it’s better to avoid the stock market and instead go for moderate and low-risk investments.
For example, if you want to invest in your newborn baby’s college education, then the stock market is a good choice to put your money in.
But prepare to sell those shares once your child reaches Grade 7, five years before he enters college. If it’s a bear market, then wait and sell your shares during the next market rally.
Afterward, you can reinvest the money in a moderate or low-risk investment. Doing so minimizes your exposure to market volatility, and provides more security to your child’s educational fund.
4. You found a better investment.
Never fall in love with your investments. Be ready to sell when you find a better one. But of course, don’t be hasty with your decision. Do your research and analysis before doing so.
Jollibee (JFC) has been and still is, my best-performing stock. I was fortunate to buy its shares when it was still around P40. However, I have sold portions of my JFC shares several times in the past and used the money to start a business.
The average growth of the stock market is somewhere around 12% per annum. Of course, businesses can give you a rate of return much higher than that. That’s why it’s an easy decision for me to sell shares when I need capital.
Interestingly though, once those businesses start making a profit, I funnel a portion of those earnings back to the stock market — it’s a powerful cycle.
Investing is not the same as trading
These advice are meant for stock market investors, who are doing investing strategies on specific stocks, which are good as long-term investments.
Stock market traders will have different and other reasons for selling their shares. So if you’re one, then this post is not for you.
But more importantly, if you don’t know the difference between a stock market investor and a stock market trader, then better read this to learn more about it.