So, you just bought a hot stock for your investment portfolio. Have you thought about selling it yet?
I know, you just bought it, and selling it is the furthest thing from your mind, but taking the time to plan an exit strategy makes sound investment sense. Knowing when to sell off any particular stock is not easy. Hang onto it too long and it can become a loser. Sell it off too soon and you’ve lost money also. This makes having a plan vitally important.
Arguably, the most important thing it does is take emotions out of the picture and replaces them with rational decision making. This leads to higher performance and earnings over a longer period of time.
Knowing when to sell.
1. Profits have dropped like a rock – If you see a high loss of earnings for a particular company, it can be a strong signal to sell off your stock.
Keep in mind, it’s easier to sell now than to hang on in hopes that the company, and the stock, will turn around. If you see a real shift in the way the business is being operated, it’s time to sell.
2. Set a target price that you’ll sell at – When you buy any new stock, have a target price in mind, or on paper, of when you’re going to sell.
You can base this on the current company earnings, the outlook for earnings, and the growth potential of the company in the coming years. Once you set a target price, stick to it. You find that many times it’s easy to see the stock hit your target range and you’ll think that hanging on will produce even more profits, but it can easily fall back and it’s too late.
3. Be a realist – Understand the reasons why you have bought a particular stock, and keep them in your mind. Then, if things change for the worse, or if the reasons why you bought the stock no longer hold true, sell it off. It’s better to get out now than later.
4. Watch for trends – Be sure to keep an eye on the overall stock market for current trends. If you see it is on a bear run, take some money off the table. No, don’t sell all your stocks, but pull back 10-20% and hold on to some of your capital to use later when things turn around. Which stocks should you cut back on? I would advise cutting down on the stocks that are your riskiest. Those that have the most volatility.
5. Keep an eye on price-to-earnings ration – If the PIE goes above its historical level, consider selling it quickly. Most likely it’s overvalued and is about to come down. Although this isn’t always the case, look at all the factors that are involved and then make a decision.
Use these tips in planning an exit strategy and it will make stock investments a little easier for you.