Realizing when to sell a stock or mutual fund can be harder than figuring out when to buy one. You may become anxious to sell after a stock or fund dips, or hold on to a security too long, hoping its share price continues to rise.
“The golden rule is to buy low and sell high,” says Rui Yao, associate professor in the personal financial planning department at the University of Missouri in Columbia, Missouri.
However, following that golden rule isn’t as easy as it may sound. In fact, over the past 20 years the average investor’s returns were approximately half those of the S&P 500, according to a report by DALBAR, Inc., which tracks investor behavior.1 The reason for that poor performance, according to the report’s authors: Individuals tend to jump in and out of the market based on emotional reactions, which hurts returns over time.
Generally most investors should follow a buy-and-hold strategy rather than buy and sell shares frequently. However, in certain circumstances it may make sense to sell a security. Consider selling stock if you are in one of the following situations:
Your goals or time horizon have changed. Your asset allocation—how you split your portfolio among stocks, bonds and cash—ideally is based on your goals, as well as the time you have until you expect to reach them. If a goal or its timeline has changed, your asset allocation should change too. For instance if you have decided to retire earlier than you planned, you may need to sell some stocks to minimize the possibility of short-term drops in your portfolio’s value.
The security is performing poorly. If a security’s price has dropped because of a change in the company’s leadership or business model, it may be a good time to sell a stock and avoid further losses.
However, it’s important to put price changes in context. Stocks and stock mutual funds experience short-term volatility. Over the long term, however, stocks historically have produced the gains necessary to outpace inflation. That’s a critical consideration when saving for goals such as retirement, which may be decades in the future.
For some perspective on your investment’s performance, compare it with its peers through a site such as Morningstar.com. You may decide to sell—or you may learn that similar securities have dropped too, and stay the course.
You need to rebalance. Say your target allocation is 60 percent stocks and 40 percent bonds. Over time the varying performance of different asset classes changes that allocation. If stocks have done well, for example, they might now represent 70 percent of your portfolio.
In this case one strategy to get your asset allocation back on target is sell that extra 10 percent of stocks and use the proceeds to boost your bond holdings. While it may seem counterintuitive to sell a stock when it’s doing well, doing so means you are selling high and locking in gains.
If you have questions or concerns about a specific investment or your overall portfolio, consult a SunTrust financial advisor for assistance.
1 "Quantitative Analysis of Investor Behavior 2013," DALBAR Inc.