8 Reasons Why You Sell Stocks

I was asked the question, “How does one know when to sell a stock?”. This is probably one of the most common questions I get from friends and family. The reasons why one sells stocks can differ depending on the type of investor you are. Traders may have more technical reasons why they sell which I will not get into here.

As a long term investor and not a trader, here are my 8 reasons why you sell stocks.

8 Reasons why you sell stocks

1. When your allocation is off and to re-balance your portfolio. Track your portfolio using a spreadsheet or one of many online platforms such as Personal Capital. Determine a weight to each stock holding you wish to assign and feel comfortable with. Over time, you may come across a scenario where some of your holdings may appreciate where the weight you desired for the holding becomes much more than what you feel comfortable with. This is when you may consider to sell to bring the weight back to your desired level.

2. When you’re low on cash holdings. Determine a set amount of cash you wish to have as ammunition for opportunities that may arise in the future. If your range for cash holdings are set between 8%-10%, you may consider selling stocks to raise cash when cash dips below your range. 

3. When you need the cash in the near term (1-2 years). Investing in stocks is a long-term game. If you need the cash in the next 1 to 2 years, it is recommended you hold the cash in low risk vehicles such as savings accounts, money market, or short duration bonds. Keep in mind, money markets and bonds do come with some risks but nothing near as stocks.

4. When the business fundamentals and long-term prospects change. When the original thesis of why you invested in a company no longer holds true, you should re-evaluate and may consider selling the stock.

5. Stock becomes overvalued. There is a famous saying in wall street, “bulls make money, bears make money, pigs get slaughtered.”. You will come across an investment that will appreciate dramatically where multiples are hitting all time highs and may signal being overvalued. You may consider taking profits. This is ideally a great time to raise cash if you are below your cash holdings range mentioned above.

6. When you are having trouble sleeping at night due to market fluctuations. Not everyone can stomach 40% declines in stock values. Some may struggle with corrections of 10% or 20% declines. If this results in emotional stress, anxiety, trouble sleeping, to where you have trouble with your daily life responsibilities, you may consider selling. Learn to control your emotions and better understand the nature of stock fluctuations so you are more likely to sleep sound during corrections.

7. Reduce your taxes for ordinary income or offset gains. You may consider selling stocks in the red to offset capital gains or ordinary income for tax filing write offs. Capital losses of up to $3,000 per year can be used to offset gains and income when filing taxes with the ability to carryover any remaining amount towards future gains.

8. There are better returns for your money relative to risk. Sometimes you may be invested in some stock primarily for the purpose of dividends. When bond interest rates are higher and savings provide a risk free return of 3%, you may want to sell a stock with a 3% dividend for a lower risk return from bonds or savings.

What other reasons do you have that may cause you to sell stocks? Would love to hear your reasons below. Thanks for reading.