Over the past few weeks the market has been throwing its toys out of the pram. But most analysts and financial commentators have been touting the benefits of long-term investing, declaring that investors with a long-term view shouldn’t be looking to sell after the recent turbulence.
This is all very well, but as an investor myself, I know it’s difficult to stop yourself from hitting the sell button after a stock has fallen 20%, 30% or even 50%.
So, the question is, when should you sell a stock?
When is the right time to sell?
Well, some investors will say a 20% decline is enough to make them sell, which is all very well, but attempting to time the market like this can significantly hold back returns over time (something I’ve written about before).
Unfortunately, there’s no simple formula to know when to sell, you have to figure it out for yourself. One way of doing this is to keep a record of why you brought the share in the first place.
Indeed, if you make a note, or maintain a log of the reasons that led you to consider a given stock and which of those reasons you found most compelling when these conditions change, you’ll know whether the entire thesis behind your purchase proved to be incorrect. If so, it’s at this point that you’re given your first warning that it could be time to sell.
Another reason to sell could be as simple as you’ve just found something better. It’s imperative to keep your emotions and the stock market separate. You see, stocks aren’t people, and it’s perfectly OK to sever your ties with one and become friendly with another. That said, this approach can be damaging to your wealth if you chop and change too much. If you’ve made an investment with a particular thesis in mind, wait for this thesis to play out. If it becomes clear that the company won’t be able to achieve what it promised, it might be time to move on.
When not to sell
Deciding when to sell isn’t a precise science, of course. As any experienced investor will tell you, chances are you will sell at the wrong time. Stocks you sold thinking they would fall further will rise, and stocks you sold believing they wouldn’t gain much more will continue to head higher. But that’s just part of investing.
However, one thing’s clear: you shouldn’t sell just because the market is falling. Remember, shares aren’t just a lottery ticket to wealth, they’re an ownership interest in a business. The share price is just a marker of what someone is willing to pay for a share of that particular business at that specific point in time.