5 Good Reasons to Sell a Stock
At 7investing we believe in long-term, buying-and-holding because compounding works best when not interrupted. Still, there are times when it's better to cut a stock loose.
September 22, 2021
While we firmly believe long-term, buy-and-hold investing is the most effective way for individual investors to build wealth, there are times to consider selling investments. These can be for different reasons, some of which do not even have to do with the stock’s underlying business you’re selling.
Here are some reasons to consider selling:
- When you need the money. We are all investing for different financial goals. That can include retirement, college savings, giving to charity, or going on a dream vacation one day. When the life events we are saving for arrive, it’s time to sell!
- When the time horizon for needing our money shrinks to under three years. The stock market is an excellent tool for compounding long-term wealth, but in the short term, it can experience violent bouts of volatility. Don’t put capital at risk in the stock market if you need it in less than three years. A more conservative investor might want to expand this time horizon to five years.
- When a position gets too big. There is no magic number, but if a position in your portfolio takes up such a large allocation that you find yourself losing sleep or constantly fretting about the company, take a little off the table and trim your position back to a more manageable size. For some investors, an allocation of 10% might be too big, while, for others, a 20% position is acceptable.
- When there is a better buying opportunity elsewhere. This is ambiguous, and jumping to each shiny, new hot stock is a recipe for subpar investment results. But when there are genuinely better investment ideas that you need funds for, looking to sell your lowest conviction ideas can be a good idea. Before you do this, however, review your potential sale’s original investment thesis to ensure you are not letting your emotions get the better of your judgment.
- When your investment thesis is broken. As stated in Our 7 Principles, developing a thesis every time you buy a stock is fundamental to making good buy and sell decisions. When your thesis is disproven by the company’s business performance – not its price action! – it might be time to sell the stock.Write out exactly why you’re investing in a company and the specific things that will tell you if it’s doing well or poorly. The more quantitative and company-specific, the better. Use this as the standard to objectively evaluate the business when its stock price is falling. If the buy thesis is still intact, it will let you hold or even add with confidence during these drops. And if the original thesis no longer holds true, it might very well be a good time to sell.
It is this last bullet point that is so difficult for many of us, myself included. I have mistaken slightly disappointing quarters before for broken theses and sold out of positions too soon. I cannot stress this enough: When looking at subpar results, carefully consider if the news is just a temporary storm cloud or thesis breaking. Every company will disappoint at times, and selling out of a position too soon can be a return-killing mistake.
Our advisors recently took a closer look at several of our previous 7investing recommendations, and we found a few things we didn’t love. Click here if you’d like to see the specific red flags that we have identified.
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