As the investing truism goes, time in the market is better than timing the market. The spirit of this adage is that it’s generally better to sit tight and hold onto your investments rather than frequently buying and selling.
It’s impossible to know, without the benefit of hindsight, whether you’re selling one of your top stocks or funds at its peak price, or if in doing so you’re potentially missing out on future gains – so the best thing to do is usually to sit tight and let the tendency of the stock market to rise over time do its thing.
“Knowing when to sell a share can be one of the most difficult decisions an investor can face,” said Richard Hunter, head of markets at investing platform Interactive Investor (ii).
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After all, when you first bought the stock, you hopefully did thorough research on the company and its prospects, and had conviction that it was set for success in the long run.
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“The position becomes less clear as human psychology kicks in,” said Hunter. “If the share price has declined, there is a natural reticence to hold on to the shares rather than sell and admit defeat, even if prospects have obviously deteriorated.
“On the other hand, if the shares have risen as had been hoped, there is a fear of missing out on further gains if the investor crystallises the profit.”
Selling a stock can sometimes be sensible when there are good reasons and you do it in an informed and considered way rather than impulse or in an attempt to time the market.
Profit-taking (selling a winner)
The first reason to sell might be that the stock has performed well and you want to bank some of the profits.
“One strategy which some investors use is known in the parlance as ‘top-slicing,’” said ii’s Hunter. “Imagine that an investment of £10,000 had fortunately come good and doubled to £20,000. By selling £10,000 worth of shares, the investor would be breaking even. The remaining £10,000 would then leave skin in the game as well as representing pure profit.”
How much profit you take is of course up to you – you don’t have to sell your entire allocation, or even half of it. Remember, though, that a profit (or loss) is only on paper until you sell.
Consider also the timing of selling a stock. If the shares are held outside an ISA, selling at a profit could make you liable for capital gains tax.
Loss-limiting (selling a loser)
On the other hand, a stock that is underperforming is a very tempting target to sell, especially if you’ve lost faith in the company’s ability to turn things around.
You’ll have noticed that this is the opposite of profit-taking, but despite appearing contradictory, both approaches “make perfect sense” according to Hunter.
“While it is ‘never wrong to take a profit’, traders will point to ‘running your winners and cutting your losers,’” he said.
Be sure to check whether your initial thesis for buying the stock is no longer intact before you sell, though. Some investors might view a share price decline in a stock they still believe in as evidence that the market has overlooked something; value investors might even consider the decline an opportunity to buy more of the stock on the cheap.
Portfolio rebalancing
It’s generally considered good practice to reset your portfolio at certain intervals – maybe quarterly or twice-yearly.
When you do so, assuming that you reallocate your investments so that each carries the same weight as it did when you last rebalanced, you will sell some of your top-performing stocks, as these will now constitute a larger percentage of your portfolio than they did before.
Risk profiling
Similarly, you might sell a stock because your own risk appetite has changed since you bought it.
Perhaps you bought a high-growth stock 10 years ago when your priority was portfolio growth. You’re now 10 years closer to retirement and wealth preservation is likely to be a higher priority for you than capital growth, so you may feel the right decision is to sell this stock and use the profits to invest in a more defensive alternative, or one that offers a higher dividend yield.
“Consider the reasons you bought the shares in the first place,” said Hunter. “Are they still intact? Does the holding still fit into your investment objectives?”
Ultimately, he added, there is no definitive answer to whether and when it’s right to sell a stock, and the decision will vary from person to person.
“As long as the investor is comfortable with the rationale, there is no right or wrong time to sell,” he said.
