As the market fell and investors panicked, The Motley Fool held a live chat Monday between Fool readers and our writers and analysts. Among the many questions our readers posed: "How do you know if it's time to sell a loser and go with another stock instead?" There are lots of times to sell, but you need to distinguish between temporary and permanent problems.
The market's deep dives have left investors hyperventilating, their fingers hovering nervously over the "Sell" button on their brokerages' trading platforms. They've just been reminded how volatile the stock market can sometimes be; some of their holdings are down a lot; and they have an urge to take their losses and perhaps swear off stocks altogether.
Frankly, that's a terrible idea. If you're going to invest in stocks, you have to accept that the market will occasionally crash, but that its long-term trend has been upward. Great stocks don't move up in a straight line -- they zig and zag. Jumping into the market when it's been booming a while, and bailing out when it crashes, is a perfect way to lose money. Giving in to greed and fear can deliver you to the poorhouse.
Let's review some of the many reasons why you might sensibly sell a stock -- and move the proceeds into something else.
If a stock's price seems to have gotten way ahead of itself, consider selling. It may now be more likely to fall closer to intrinsic value than to keep advancing. The stock market's recent swoon should make this less of an issue for most stocks. For example, by several measures, Krispy Kreme
Of course, some companies, such as Amazon.com, almost always seem overvalued, but they keep advancing year after year. SodaStream
Ask yourself how well you really understand your holdings. If you can't explain what a company does and exactly how it makes its money, you may end up with some nasty surprises. Either learn more about the company, or sell it.
Consider Chimera Investment
Many times, the reasons we buy a stock disappear. You might have invested in Eastman Kodak
Paying attention to your holdings can pay off when you spot potential trouble. Advanced Micro Devices
Temporary vs. permanent
Before you sell a stock, ask yourself whether the condition driving you to sell will soon pass by, or whether it's here to stay.
Gobs of stocks have lost a lot of value recently, falling along with the overall market. But much of that drop wasn't related to each individual stock. Automakers' sales didn't suddenly drop 5% or 10%. Delivery companies were not suddenly facing sharp declines in volume. Merck saw its price fall along with the market, but people living with medical conditions won't abruptly stop taking their medications, and the drugs in Merck's pipeline haven't become less likely to win approval.
Your best ideas
When deciding whether to sell, ask yourself whether you're invested only in your best ideas. After all, why put any money in anything other than the companies that inspire the most faith and hold the greatest potential? If any holdings are not your best ideas, consider selling and moving that money into more likely winners.
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Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Chimera Investment and Exelixis. Motley Fool newsletter services have recommended buying shares of Amazon.com, SodaStream, and Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.