When to Sell Stocks — 5 Signs It's Time to Let Go
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There are countless articles and hours of video content explaining how to invest and which stocks to buy, but how do you know when to sell stocks you’ve bought?
In this video, Motley Fool CEO Tom Gardner talks with columnist Morgan Housel about the 5 signs you might want to sell a stock:
1) You need the money
2) The position is too large relative to your overall net worth
3) The position is too small to be meaningful
4) You aren’t interested in the company anymore
5) The business could be disrupted
Tom Gardner: here are reasons to sell and I’ve got a handful and Morgan, I think you’re going to be like the assassin here. You just have one. You have one reason to sell.
Morgan Housel: And it’s definitely the biggest reason. I don’t know if it’s the only reason. But to me the biggest reason is it’s just whenever you need the money. Rather than saying I’m going to sell when the stock reaches X dollars or when it does this, or if I think it’s overvalued or undervalued, I would just sell when you need it, when you need the money to retire or to send your kids to college, whatever it is.
Morgan Housel: I think if that’s your goal, if that’s just the baseline expectation. I think there’s a lot of evidence that that’s the best way to invest. That selling good companies or selling any companies, on average, is detrimental to your longterm success. Let me give you a quick example of this. The S&P 500 is made up of 500 companies. Those companies are rearranged every few years. Some are kicked out, some are brought back in. If, over time, there have just been no changes to it whatsoever. The people at S&P didn’t kick anyone out, didn’t bring any new ones in. The index would have done much better. Just the constant getting rid of things that you don’t think are working anymore tends to be a bad thing that works against you over time. I think just leaving it alone until you need the money is a great way to do it.
Tom Gardner: Motley fool Stock Advisor…the data shows since 2002 when the service was launched, if we had never sold a stock, going back to 2002, we would have better returns overall and the returns are market smashing returns. But we would have had better results. Why is that?
Morgan Housel: I think it’s because the companies that you’re tempted to get rid of are often companies that are cheap and cheap companies tend to go on and do very well. That’s broadly why it is. The companies… Most people don’t get rid of companies in their portfolio that are doing very well. It might make a lot of sense intuitively to say, I’ve made a lot of money on the stock. Let’s sell it, let’s lock in the gains. But that’s not what people tend to do. They tend to sell the losers and the losers tend to be, if you take a value mindset, those would tend to be the stocks that will have a high return potential.
Tom Gardner: I will add to that that I think all it takes is selling one or two future big winners too soon…
Morgan Housel: Makes a big difference.
Tom Gardner: …that you can’t possibly catch up with what you lost by missing out on a 10 bagger. It’s very hard to catch up with other intelligent sells. So it’s better to just collectively hold all of them. I’ll add a few when to sell rules to your great one and one of the reasons I really think that that’s a great suggestion Morgan is cause it’s personal. Which is I think the first way that people should think about selling is a more personal question. Don’t get too wrapped up in quarterly earnings, or is the CEO leaving, or what’s happening in the business? Do I believe in this anymore? Start from a very personal place. Number one, do I need the money?
Tom Gardner: Number two, is this position in my portfolio too large? So certain situations along the way, we end up with a 100 bagger in Netflix and it becomes more than 20% of someone’s net worth. And I think at that level, for me, I would start to begin to think about selling, incrementally, portions of it. Because as much as it’s great to see things run, if they become 50% of your net worth, 70% of your net worth, it actually can take over your mindset in life and become too front and center for you on a daily basis and cause you to look too closely at it. So, for me, 20 to 25% of your net worth in a single stock, that’s the time to think about paring it back.
They’re a 0.3% position in your portfolio.
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