When should I sell stocks?

Investors often buy stock with the hopes of making money and coming closer to meeting their long-term financial goals. For many investors, buying low and selling high has typically been the strategy to achieve this. You can buy individual stocks or gain exposure to multiple stocks at once in a mutual fund or exchange-traded fund (ETF).

The buying part can be relatively simple – deciding when to sell a stock, however, is a bit trickier. Selling too early or too late is a fear that most investors have, which is why many advisors recommend staying invested for the long term and tell their clients not to lend too much weight to day-to-day stock price fluctuations. After all, history shows that markets tend to rise over time, so time in the market is better than timing the market. What’s more, stock picking is a very risky practice, and novice investors are advised against it due to its potential for big losses.

However, there are several scenarios that might help investors decide when to sell. Let’s explore them in greater detail.

Reasons to sell individual stocks

Investors may choose to sell their stock for any number of reasons listed below. Often, a combination of these reasons ultimately convinces many investors to sell, but it’s worth assessing your current financial situation and overarching goals before making any decisions. It can be helpful to consult with an advisor prior to making an investment decision.

The investor needs to rebalance their portfolio

Traditional investing theory has evolved to place an increasing emphasis on portfolio diversification, thanks to the Modern Portfolio Theory (MPT), first introduced in 1952 by American economist Harry Markowitz. In fact, most long-term investors nowadays are strongly encouraged to routinely diversify. Typically, this involves allocating a certain percentage of their portfolio to different asset classes, like stocks and bonds. Furthermore, each asset class is often further subdivided into different sectors and geographies.

Sometimes, these allocation percentages get skewed, which creates an unbalanced portfolio. For example, if a certain stock shoots up in price, this would disproportionately increase its share of the investor’s portfolio. Another example is investors nearing retirement age; they may want to decrease their exposure to stocks, which are considered higher-risk assets. When this happens, investors might sell certain stocks to realign their portfolio more closely with their goals.

A change in the company’s fundamentals

When we talk about fundamentals in business, we’re referring to quantitative and qualitative metrics that show the financial health of a company. These metrics typically include revenue, assets, profitability, liabilities and growth potential. For example, if an investor initially bought a stock because the company’s price to earnings ratio (P/E) was below a certain number, they might consider selling the stock if this number changes.

In other words, these kinds of metrics point to a company’s overall financial performance, which can influence investors’ decision-making.

But don’t let a bad quarter compel you to sell – while your portfolio balance may temporarily dip if a company doesn’t ace their quarterly performance, you might be able to capitalize on certain silver linings during these down periods, such as purchasing their stock for a lower price. Another possibility is that the company bounces back, causing the stock price to rebound in turn. These are just a couple of examples of why holding steady through these troughs can be beneficial for investors.

A cut in dividend payments

Potential dividend payments may be another reason investors choose to buy a particular company’s stock. These payments come out of the company’s earnings, and the amount is usually determined by its board of directors. Many investors choose to invest in dividend stocks in hopes of generating recurring supplemental income.

It’s worth noting that any formal public announcements on a company’s dividend payouts typically will trigger a rise or fall in their stock’s price. Following this, dividend cuts are not always a sign to sell. Other factors – such as systemic financial stress, smaller cuts than anticipated, a merger and acquisition or too harsh of a market reaction to the cuts – may signal to investors that it’s better to hang tight.

Ultimately, it’s often better to stay invested for the long term, so consider the full picture in tandem with your personal goals before deciding to sell stock in light of dividend cuts. To reiterate, they are often not a surefire sign to sell a company’s stock.

A company acquisition

Speaking of mergers and acquisitions, investors may consider selling the stock of a company that‘s in the process of being acquired. This is often because of the way the market reprices the stock of both the acquiring and acquired companies.

But this scenario becomes more relevant if the stock price of the company being acquired is lower than the price that the acquiring company has agreed to pay. In this case, the stock price of the acquired company may rise to the higher buying price. Sometimes, the stock price of the acquiring company will fall to the lower buying price as well – especially if it’s higher before the acquisition.

Once the stock has been repriced, there is a short period of stagnation as the market evaluates the prospects of the combined entity. This may spur an investor in the original company to sell their shares, particularly if they aren’t keen on being a shareholder in the acquiring company.

Tax-loss harvesting

Certain investors may choose to sell stocks that have declined in value as part of a strategy called tax-loss harvesting. You may be able to use your investment losses to help offset capital gains taxes on current or future earnings from other parts of your portfolio.

Once you have locked in your capital loss for tax purposes, you can use the proceeds of your sale to buy shares of a similar – but not identical – stock, helping you maintain the desired allocation of your portfolio. However, it’s important to avoid a “wash sale,” which occurs when you buy a “substantially identical” replacement security within 30 days of the sale, as this would cause the loss to be disallowed. Given the complexity of tax-loss harvesting strategies, it could be worth consulting with a tax professional about any transactions you’re considering.

The investor needs money

Of course, the most straightforward reason to sell stock is because the investor needs money – nothing more, nothing less. Even though the general rule of thumb is to invest money one probably won’t need for the foreseeable future (i.e., usually five years or longer), certain circumstances might compel an investor to cash out their stock holdings sooner than that, with the need for cash being one of them.

Reasons to sell funds with stocks in them

While many funds are a mix of stocks and bonds, some are made up entirely of stocks (i.e., stock funds), and they have historically performed better than other investments – like bonds – over the long term. However, different funds are appropriate for different investors’ time horizons, risk tolerance and financial goals. There are also stock mutual funds and stock ETFs available for purchase – but when is the right time to sell them?

The good news is that the reasons investors choose to sell these funds can overlap heavily with the reasons they may choose to sell individual stocks. However, there are a few unique reasons investors might consider selling these funds.

Long-term underperformance

If a fund is consistently not hitting its benchmark for at least a couple of years, an investor may consider selling. However, there are some key metrics worth looking at before deciding to sell. For example, check the fund’s tracking error margin, which measures the fund’s performance against the benchmark it’s trying to hit. A smaller margin indicates that the fund’s performance more closely matches the index’s return, but that doesn’t mean a bigger one signals that it’s time to sell. It’s important to take into account your time horizon, risk tolerance and overarching financial goals before making the move.

A change in fund manager

Some mutual funds and ETFs are actively managed, which means a fund manager handles the fund for you and makes trades based on their experience and expertise. Of course, no two fund managers are alike, meaning a change in fund manager could lead to a fundamental change in the fund’s investment strategy and goal; if these changes don’t align with your own goals anymore, selling the fund may be appropriate for you.

The fund has gotten too big

Believe it or not, the size of a fund can impact its performance at times. This is because it’s harder to move assets efficiently as the fund gets bigger. However, this is mainly a problem for funds that have lower volume and liquidity, be it a mutual fund or ETF; think small-cap funds or focused funds (i.e., funds that invest in particular stocks and/or bonds in relatively niche sectors). If a fund has gotten big enough to the point that its liquidity has been significantly affected over an extended period, it may be time to reconsider whether you want to hold onto it or not.

Tax implications of selling stocks

It’s critical to consider the tax impact of selling stocks that have grown in value, as the transaction will leave you on the hook for short-term or long-term capital gains taxes, depending on whether you’ve held the asset for shorter or longer than one year. You may want to speak with a tax professional about how any potential stock sales could affect your tax bill.

The bottom line

As you can see, there are plenty of reasons why selling stock – whether they’re standalone or grouped in a fund – might be appropriate for you and your financial strategy. If you need help determining whether selling a particular stock or fund might be appropriate for your investment strategy, consider contacting a J.P. Morgan advisor today.

View Disclosures