When to Sell Stocks -- for Profit or Loss

Reasons to sell a stock

Here's a rundown of five scenarios that can justify selling a stock:

1. Your investment thesis has changed

The reasons why you bought a stock may no longer apply.

Examine why you bought a stock in the first place and ask yourself if those reasons are still valid. You should have a reason -- or an investment thesis -- for each of your stock investments, other than just wanting to make money.

If something fundamental about the company or its stock changes, that can be a good reason to sell. For example:

• The company's market share is falling, perhaps because a competitor is offering a superior product for a lower price.
• Sales growth has noticeably slowed.
• The company's management has changed,
• Managers are making reckless decisions, such as assuming too much debt.

Of course, this list isn't exhaustive. But the point is that if something substantially changes that contradicts your investment thesis, that's one of the best reasons to sell.

When to sell stocks for profit

Any of the above are good reasons to sell a stock for a profit. Having earned a profit from an investment can further justify selling the stock to pay for a major purchase, your living expenses in retirement, or as part of your portfolio allocation strategy.

But don't sell a stock for profit just because the share price has increased. Doing that would be falling into the trap of believing that it's a good idea to "take some money off the table" if a stock gains value.

To be perfectly clear, selling just because a stock went up is a terrible reason.

When to sell stocks at a loss

Similarly, it's usually a bad idea to sell a stock only because its price decreased, if none of the reasons listed above apply.

Having said that, selling losing investments (especially if you see better opportunities elsewhere) can help you save money on your taxes. Investment losses can be used to offset capital gains.

As legendary investor Warren Buffett says, "The most important thing to do if you find yourself in a hole is to stop digging." If your original reason for buying a stock no longer applies, or if you were just plain wrong about the company, then selling at a loss rather than continuing to hold may be your best option.

When not to sell a stock

It's important to clearly know when not to sell a stock. Here's a list of some of the situations in which it's inadvisable to sell your shares:

1. Don't sell a stock just because its price increased. Winning stocks often increase in price for a reason, and they also tend to keep winning.
2. Don't sell a stock just because its price decreased. Every investor wants to buy low and sell high. Selling a stock just because its price fell, if the reasons you bought it still apply, is literally doing the exact opposite.
3. Don't sell stock just to save money on taxes. While the tax strategy discussed earlier, which is known as tax loss harvesting, can reduce your taxable capital gains by incurring losses on unprofitable stock positions, it's nonetheless a bad idea to sell stocks just to lower your taxes. Tax loss harvesting can be a smart tax-saving strategy, but only if you are choosing to sell a losing stock for other valid reasons.

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