On our Investing Beginners discussion board the other day, new investor Jon P. raised an interesting question -- when should you sell stocks that have risen considerably? Here are his exact words:
"I have gotten lucky during my first year of investing. My portfolio is riding high, and some stocks have so far exceeded my expectations that I am starting to consider whether I should reap the short-term rewards ..."
He's already demonstrating some investing savvy by noting that his portfolio's performance so far is short-term and that it's important to also consider the long term. He continued:
Even though I bought some of these stocks for the long haul, the large [profits] have already begun to cause me to question what some of your selling philosophies are. I have overheard some friends mention that an 8% drop prompts them to sell, which is fine. I have also heard this same drop causes some to buy. Still, I have yet to really come across many ideas for "selling when the price is high"! Keep in mind that some of the stocks are definite keepers, and yes, I understand each stock should be considered on a one-by-one basis.
He also noted that most of his big winners are recommendations he got from our Motley Fool Hidden Gems newsletter. He said he was up 48% on Conexant Systems
But back to his question. When should he sell? He are some things Jon P. should keep in mind:
- What matters more than how much he's made on each stock is how much more he expects to make in the future. Have the stocks gotten significantly ahead of themselves so that they're very overvalued? Then selling might be called for. Or is it reasonable that they will continue to grow in the years ahead?
- He should weigh each holding against his next best ideas. If he thinks that he might make 15% per year, on average, in Nuance Communications over the next five years and that he might make 20% in a certain other stock, it might be smart to move his money into the other company. (Of course, he should take tax ramifications into account as well.)
- He should remember that those who've made big, big bucks in terrific companies have usually done so by hanging on for a long time. If they sell after doubling their money, they'll obviously never triple it. (Though sometimes it's not unreasonable to sell part of your position in a stock.)
Fellow board denizens offered some additional good advice. A member who goes by TheHedgehog pointed out a good read -- Paul Elliott's article "Is It Time to Sell?"
Community member Kahunacfa offered:
Whenever I buy a new stock, I write myself a short memo on the buy that covers (1) why I bought it, (2) what my price objective is for the purchase (usually a four-bagger over the next three to five years), and (3) what fundamental change in the company's outlook would trigger a sell decision. By having done that exercise before I buy, the sell decision usually takes care of itself. When [or] if I do achieve a four-bagger (a fourfold increase in the value of my investment), then I automatically sell 25% of my position to take my cost out of the stock.
Here are some additional Fool thoughts on selling, a critical topic for investors to master:
- Rich Smith: "When to Sell a Winner"
- Chuck Saletta: "How to Buy Low and Sell High"
- Shannon Zimmerman: "Is It Time to Sell?"
- Selena Maranjian: "A Time to Sell"
- Seth Jayson: "4 Signs You Shouldn't Sell"
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.