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The Right Time to Sell a Stock

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It's hard to admit when you've made a bad move in your portfolio. But if you can identify mistakes before they cause major damage, changing your mind and selling a bad stock can do as much toward preserving and growing your overall portfolio as finding big winners.

Unfortunately, with many investors, hope springs eternal. So it's only after the market has already suffered a significant correction that many people really take a critical look at their portfolios to make sure all their stocks still belong. Ideally, you should regularly check on your stocks, even when they're trading at new highs.

Even if you haven't kept up with your portfolio as much as you should, though, that's no excuse for not doing it now. So how exactly can you tell if a stock has outlived its place among your investments?

Pulling the trigger
In this month's brand new issue of the Fool's Rule Your Retirement newsletter, which is available to subscribers this afternoon at 4 pm ET, Fool retirement expert and Certified Financial Planner Robert Brokamp takes a closer look at the question of when you should sell a stock.

First and foremost, Brokamp reminds us that not every sell decision involves a stock that has done poorly. Often, you'll simply need to raise cash for living expenses or major purchases. In that case, the question can become one of picking from among many perfectly good investments in the hope of picking the one with the least potential. Robert discusses several ways to decide which investments to sell, some of which actually involve targeting the biggest gainers in your portfolio.

But let's face it: most of us don't have a perfect record picking stocks. It's been easy to fall into traps lately:

  • A year ago, National Bank of Greece (NYSE: NBG  ) seemed to be firing on all cylinders and had nearly quadrupled from their March 2009. But fears of a Greek default on its sovereign debt have sent its stock back down toward those 2009 lows again. Fellow Greek stock DryShips (Nasdaq: DRYS  ) has followed a similar trajectory.
  • Until a few months ago, energy stocks looked poised to keep rising, with oil prices comfortably above $75 per barrel. But the BP disaster has inflicted collateral damage on stocks throughout the sector. ExxonMobil (NYSE: XOM  ) now trades at four-year lows, and both Total (NYSE: TOT  ) and Petroleo Brasileiro (NYSE: PBR  ) are close to where they were trading during the worst of the market meltdown in early 2009, thanks to the double-whammy of the spill along with Europe's concerns in Total's case and a possible emerging market slowdown for Petrobras.

You can't expect to predict financial crisis or a major oil spill ahead of time. The key to avoiding losses, though, is by setting up damage control in advance.

Know what you own -- and why
The key to a smart selling decision is to have figured out beforehand what would make you sell. That means coming up with an investment thesis when you buy and updating it as circumstances change. When a stock no longer fits the parameters you established when you first bought it, then it's definitely worth considering a sale.

That can work out in a number of ways. With Sanderson Farms (Nasdaq: SAFM  ) , for instance, the Fool's Inside Value team established a valuation target when it first bought the shares a year and a half ago. As feed costs plummeted and bird-flu fears abated, the stock rose sharply as expected. Having reached full value, it was time to sell in favor of finding better value propositions.

On the other hand, sometimes things happen that actively hurt prospects going forward. AMR (NYSE: AMR  ) , parent of American Airlines, has gone nowhere over the past two years and trades at a quarter of its 2007 value. Consolidation in the industry, including the proposed deal between UAL's United and Continental Airlines, could well put AMR in an even worse position. If you were counting on AMR to play a bigger role in a merger of its own, the disappointment of its being left on the sidelines could be just the argument you need to finally dump your shares.

The details of selling
Once you decide to sell a stock, you still have more work to do. If you have both retirement and non-retirement accounts, which one you sell from can make a huge difference. Coordinating various parts of your portfolio is a challenge in itself, but Brokamp runs through all the ramifications.

To get all the details, along with some opportunities you might not have thought of, be sure to check out the new issue of Rule Your Retirement this afternoon. Even if you haven't subscribed yet, you can get full access with a 30-day free trial -- just click here to start today.

Admitting defeat on a stock is never easy. But moving on is the best thing you can do with some stocks, before they can hurt you even more.

Fool contributor Dan Caplinger knows when you sell is as important as when you buy. He doesn't own shares of the companies mentioned. Sanderson is a former Motley Fool Inside Value recommendation. Petroleo Brasileiro and Total are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't sell you out.

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