When should you sell your stocks? Here are the five rules for when to sell your stocks.
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When should you sell your stocks in the stock market? That’s one of the most common questions I get. How do you know?
Selling can always be a stressful thing to do because ideally, if we did a good job buying a stock, the best time to sell - should be never. If you are going to be selling some of your stock whether that's for some passive income, or if you'd like to save money to perhaps invest somewhere else, here are 5 great rules to stick to.
For reference, I'm using the Robinhood app, and I'm a dividend investor but this should apply no matter which type of investor you are. Please Note: this video is for entertainment purposes only and I will not be held responsible for any incurred losses.
Sell Rule #1, you might want to sell when the company long term “profitability” is not looking too good. They did a study analyzing stock returns between 1990 and 2010, and stocks with the highest trend in earnings growth, returned 11.5% per year, which is a LOT if you’re not sure - while the stocks with the lowest earnings growth, returned only 1.5% per year - which is pretty much less than inflation. Just for comparison, the top 500 companies in the US returned an average of 6.3% per year. So basically what that means is, companies that can grow their earnings over time will see the stock price obviously move higher.
Sell Rule #2 - selling when a stock has gotten excessively expensive. One good example right now is Tesla. The hype is at it’s peak, everyone screaming about Tesla and it’s worth more than GM and FORD combined. When that happens, it’s a good time to consider pulling back on the company and waiting until a more reasonable valuation and the price of the stock drops.
Sell Rule #3 - If the size of your position becomes overly large - you may consider selling. If you’re a dividend investor like me, you might notice one of your companies is responsible for a REALLY big portion of your income, and you don’t want to be in that situation. Because if the dividend gets cut, you lose a big part of that income, so you want keep them in moderation so they don’t represent an overly large percentage.
Another way to look at it is if the value of the stock itself has increased to more than 5% of your entire portfolio. Anything above 5% of your entire investment portfolio should be taken a look at and maybe leveled off and brought down below 5% because anything more than that - can become risky. 5% is not the definitive rule, it’s just what I’ve been comfortable with
Sell Rule #4 - sell when you have a better investment idea. This could be anything, it doesn’t even have to be another stock. It could be real estate, a bond, or your education. In the case of my stock portfolio, there are definitely companies in that are losing money that could be put to better use elsewhere in a company that’s perhaps more healthy, pays a safer dividend, or has a higher earnings growth. Fortunately for me, there are enough winning companies that offset any losses from my other investments that more than make up for it all.
Sell Rule #5 is probably the best and easiest way for us as dividend investors to keep track on when to sell a company. Obviously, the goal is to have our dividend income fund our lifestyle from all the passive income we collect, however - If a stock becomes dangerously close to cutting it’s dividend, it’s usually time to sell.
*Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
