Over the past few weeks the market has been throwing its toys out of the pram. But most analysts and financial commentatorshave been touting the benefits of long-term investing, declaring that investors with a long-term view shouldnt be looking to sell after the recent turbulence.
This is all very well, but as an investor myself, I know its difficult to stop yourself from hitting the sell button after a stock has fallen 20%, 30% or even 50%.
So, the question is, when should you sell a stock?
When is the right time to sell?
Well, some investors will say a 20% decline is enough to make them sell, which is all very well, but attempting to time the market like this can significantly hold back returns over time (something Ive written about before).
Unfortunately, theres no simple formula to know when to sell, you have to figure it out for yourself. One way of doing this is to keep a record of why you brought the share in the first place.
Indeed, if you make a note, or maintain a log of the reasons that led you to consider a given stock and which of those reasons you found most compelling when these conditions change, youll know whetherthe entire thesis behind your purchase proved to be incorrect. If so, its at this point that youre given your first warning that it could be time to sell.
Another reason to sell could be as simple as youve just found something better.Its imperative to keep your emotions and the stock market separate. You see, stocks arent people, and its perfectly OK to sever your ties with one and become friendly with another. That said, this approach can be damagingto your wealth if you chop and change too much. If youve made an investment with a particular thesis in mind, wait for this thesis to play out. If it becomes clear that the company wont be able to achieve what it promised, it might be time to move on.
When not to sell
Deciding when to sell isnt a precise science, of course. As any experienced investor will tell you, chances are you will sell at the wrong time. Stocks you sold thinking they wouldfall further will rise, and stocks you soldbelievingthey wouldntgain muchmore will continue to head higher. But thats just part of investing.
However, one things clear: you shouldnt sell just because the market is falling. Remember, shares arent just a lottery ticket to wealth, theyre an ownership interest in a business. The share price is just a marker of what someone is willing to pay for a share of that particular business at that specific point in time.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
