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There are good and bad reasons to sell stocks — do you know the difference?
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The stock market has been very turbulent recently, and many investors might be tempted to sell their stocks and stay on the sidelines. And that’s especially true if your stocks are down — after all, losing money can be scary, and it can seem like a good idea to cut your losses, especially with many experts calling for a recession.
However, it’s generally not a smart idea to sell a stock just because the price went down. In this article, we’ll discuss some good reasons to sell stocks, as well as when you shouldn’t.
Good reasons to sell
Every situation is different. But for the most part, the good reasons to sell stocks fit into one of these categories:
Your reasons for buying no longer apply — For example, if the company you invested in starts losing market share to its competitors, it can be a good reason to walk away.You need the money — I generally suggest that any money you might need in the next couple years shouldn’t be in the stock market, but if you need the money, it can certainly be a valid reason to sell. For example, if you’ll need to pay your child’s college tuition in the fall, it could be a smart move to sell some stocks and put the money in a savings account or CD until you need it.You need to rebalance — It’s generally a good idea to maintain an asset allocation that fits your risk tolerance and to avoid putting too much money into any single stock. So, rebalancing your portfolio can be a smart reason to sell some stocks.Your stock is being acquired — If the company you invest in agrees to be acquired by another company, it can be a good reason to sell and move on.You find better opportunities — If you find an incredible buying opportunity in a company you have your eye on, it can be a good reason to sell some stock to free up cash in your brokerage account.
Bad reasons to sell
I alluded to this in the introduction, but it’s generally a bad idea to sell a stock just because it went up or down. If you’re a long-term investor, you own stocks because you think they’ll perform well over the next five, 10, or 20 years — not to cash out when they first start doing well.
I’ve discussed this many times, but this is a lesson I learned the hard way. I bought Tesla stock shortly after its IPO and decided to sell when MotorTrend named the Model S its 2013 Car of the Year and the stock nearly tripled. But the company was doing everything I hoped, and there was no real reason to sell other than the price. If I had held on, I would have ended up with a six-figure profit.
On the other hand, selling just because a stock went down is also a bad move. It’s common knowledge that the goal of investing is to buy low and sell high, but getting rid of a stock “before things get any worse” is literally doing the exact opposite. Now, it can be a good idea to sell if a stock’s price went down and something changed in your investing thesis. But price alone is a bad reason to sell.
Sell for the right reasons
Even the most notorious buy-and-hold long-term investors, like Warren Buffett, sell stocks regularly and for a variety of reasons — but not just because of price. There are certainly some good reasons to sell stocks, so before you do, look through the list in this article to make sure you aren’t selling for the wrong reasons.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
