Tuesday, May 8, 2007

Top 5 good reasons to sell a stock

Sell or hold? We've all struggled with what to do with a particular stock, whether it's risen 90% or plummeted 90%. Darren Rowse at Problogger.net is hosting a Top-5 Group Writing Project, so I would like to discuss the good reasons to part with a stock holding.


1. You need the money.
For me, this seems like the worst of the good reasons listed here. But there are situations that mandate a sale. If you are a retiree, it might be time to liquidate some holdings to generate some cash. Or you may want to reinvest in an investment vehicle that can generate income for you (dividend paying stock, for instance). Maybe you're a father or mother and it's time to pay for college. Or maybe you're younger and have hit a money crunch (please set up your personal finances in a way so that this can't happen to you!) But sometimes, no matter what you do, you may get into a crunch, and if you absoultely need the money and have no place else to turn, you may have to sell.

2. You have a superior investment that you can make with the money. For me, I would only sell in this instance if I didn't have available cash laying around to make that superior investment. That's one reason I sold NRGY. I had invested most of my cash and needed some funds to invest in a stock I really liked. So I sold half my position (50 shares) and invested the cash in my new stock. Also, the stock had risen over the years and I just didn't want to own that much of it anymore. I originally bought it because of its dividend, but never really did alot of research on it. So I sold half for a gain and generated some cash. As I said though, for me the decision would have been tougher had I had some excess cash laying around to invest in the new stock - I would likely have held on to all 100 shares.

3. You need to rebalance your portfolio. Come to think of it, my NRGY sale also sort of fits here. I owned almost $3,500 of it, while many of my small cap stock purchases are for amounts between $500 and $1,000. I just did not feel the need to own that much of NRGY (besides the fact that the stock had been good to me). If one of your holdings rises 1,000% and starts to represent over 10%, 20% of your overall net worth, you might feel better about your portfolio if you sell some or all of it and rebalance. Of course, I hope you're not selling the next Wal-Mart (WMT) -- that's scares the bejesus out of me and it's what keeps me holding on to the majority of my small caps -- hope that I'm holding that next superstar stock. So besides my NRGY sale, I haven't had to or done much rebalancing. But it's not a bad idea.

4. The company you've invested in has changed. You bought into a company because of its story, but for whatever reason, times have changed. Circuit City (CC) was actually featured in the cultish business book Good to Great, but look at it now. Its price is lower than it was 5 years ago. AOL was once a stratospheric stock .... need we say anything at all about it now? If the story has changed, that is OK - time change, people change, hairstyles change. Get out if you must.

5. Your stock has risen to what you think it's truly worth. For me, this also means that you don't think it's going to go any higher, that it's leveled off. For the value investor, I think it would mean that there is no longer hidden value to be unearthed in the price and it's time to move on. Either way, if you feel like the stock is worth a price that is just perfect for you, whatever that may mean, it may be time to sell.


6 comments:

Plus6 said...

This is one of the things I have the most trouble with...knowing when to get out of an investment. I have found myself holding on to stocks far too long for various reasons. I have cleaned my portfolio up significantly over the last year and am working hard at learning the best time to get out of an investment.

StockTube said...

the main fact which will force everyone to sell is when you're "desperate" in need of money ... else you will not sell simply because you've fallen in love with the stock you're holding ...

NonyMous said...

Nicely written...going through your checklist for selling a stock should minimize many peoples' anxiety and fear when it comes time to boot a stock out of a portfolio.

Q said...

nonymous, cheers! Thanks for coming by

Investing Blog said...

It's often easier to add money to your existing holdings to reallocate, rather than selling precious stock gains. Letting your winners run is a good strategy.

Q said...

investing blog,

totally agree. I rarely sell, and I haven't been in a cash crunch. I am so afraid I am going to end up selling the next Dell, Cisco, or Wal-Mart. That next stock is out there somewhere, and since I own over 40 stocks, I'm hoping I'm holding at least one superstar.