Deciding when to sell is just as important as deciding which stocks to buy in the first place. Here are some clues that it is time to consider selling a profitable stock no matter what the analyst's report says.
The fundamentals change
No matter which stock you have, you need to follow the corporation's prospects, its earnings progression and its business success as reflected in market share, unit sales growth and profit margin. Annual reports, news stories, research updates from brokerage houses, and investment newsletters are fertile sources of such information. If the company's fundamental start to weaken, it's time to reconsider your investment.
The dividend is cut
The progression and security of its dividend are important to any stock's prospects. A dividend cut or signs that the dividend is "in trouble" - meaning that analysts or creditors are quoted as saying they don't think the company can maintain its payout to shareholders - can undermine the stock price.
You reach your target price
Many investors set specific targets, both up and down, when they buy a stock; when the stock reaches the target, they sell. A good target is to double or triple your money, or to limit your patience with a stock to a loss of 20%.
How the pros decide to sell their stocks
Over the years we have asked successful investment professionals how they decide that it's time to sell a stock. Here are some highlights of what they've said:
Sell in stages as the price goes up. The chairman of a family of mutual funds: "Almost all stocks move in two-steps - two years of appreciation, two years of digestion, two more years of growth. So after a run-up in price, we sell 50% of our position, even though we may be investing for a longer term, and let the other half run."
Sell when everyone else is buying. The executive director of investments for a large pension fund:" Heavily promoted investments give me a warning signal. By the time they gain notoriety, the smart money has gotten out. You wind up holding something at the top of the market that you don't want."
Sell when momentum slows. The stock portfolio manager of a mutual fund company: "When growth slows, we sell."
Sell when the grass is greener elsewhere. The chairman of an international group of mutual funds: "Sell when you've found something better. We sell a stock to buy one that shows better potential for appreciation. We used to sell a stock to buy another that we thought had 30% more potential. We did not reach our goal of being right two-thirds of the time, so we changed our criterion to 50%."
