It is time to sell a stock when the points in your buy case have turned negative, but beware of false signals that can trick you into selling at the wrong time.
Your buy case was built to support buying the stock (see Use a Buy Case to Justify Stock Purchase.)
This written case is your reason for owning the stock. The only reason for selling the stock is if something changes the buy case. Here are some events that can fool you into selling, but may not mean your buy case has been compromised:
- Falling stock price – A drop in stock price is not necessarily a reason to sell (it may, in fact be a signal to buy). Remember that you are investing in a company and its stock may not always reflect its true value. Re-check the company’s fundamentals and if they haven’t changed, the stock is probably reacting to market conditions that are affecting all stocks or all stocks in the same sector. If the company remains a strong buy, it may be time to add more to your portfolio.
- Stock price rises – Oddly enough, investors sometimes can’t stand a good thing and sell after the stock has gone up. Stocks prices don’t necessarily operate by the laws of gravity. Just because they have gone up doesn’t mean they are doomed to come down. Some stocks keep going up for long periods, which is the idea.
- Bad news and rumors – Bad news about a stock/company can send a stock down. It might be a story about the company missing earnings or something more serious like a government investigation. Before an emotional “Oh my gosh” reaction, get facts, not rumors to assess the full impact of the news. Is this a bump in the road or a major wreck? Unless it is a serious problem, most bad news goes away quickly unless it involves criminal proceedings or a fundamental change in the company’s core business (government action eliminates a key product). Hang over bumps. If it’s truly a wreck, it is probably time to cut your losses as quickly as possible.
Knowing when not to sell is as important as knowing when to sell.
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