If you are holding shares in a company you probably want to know when the best time is to sell them. Now if you are like most people, they will sell as soon as the price starts to fall in case they lose all of their money (or usually AFTER they’ve lost their money) but is this really the best time to sell?
Panic selling because the market is falling is probably one of the worst times to sell your shares. Although there are exceptions, so in this post I’m going to let you know the reasons when you should sell and when you should hold on.
When to Sell
Scenario 1: You purchased stock in a company based on sound long term rules and the market as a whole has crashed. Your stock is now worth 40% less than what you paid for it.
In this case, then NO you shouldn’t sell. As long as the company’s fundamentals remain strong then as soon as the market recovers the stock price of your company will rise with it. In the meantime close your eyes to the charts and keep cashing those dividend cheques. It usually takes around two to three years (and in worst case scenario up to five years) to get back to where you started. If you can wait it out for ten years or more then you’ll likely make out very well (remember history tells us that on average stocks rise by AT LEAST 10% p.a. over the long term).
Scenario 2: You purchased stock based on a hot tip that it would double in price over the next few months. Instead it hasn’t moved or has fallen.
I don’t like investing in any companies based on a ‘hot tip’. But it depends on how much homework that you did on this stock before you bought into it. Did you check out the fundamentals? What was the reason this company was meant to increase (new CEO? Medical discovery?). Have you checked the stock chart over the past year to see its past history?
If the company doesn’t look like a good investment and you are relying solely on the ‘tip’ then it’s time to sell out and look for better opportunities.
Scenario 3: The company you invested into has risen by 25% and you want to take your money in case it starts falling back down again.
Again it comes back to the reasons that you invested into it in the first place. Long term rules – keep it. Short term rules (which I’ll go into in a later post) then I would probably sell and take the profit.
Should You Buy in a Falling Market?
Smart investors know that when the stock market falls it makes for some very good investment opportunities. As I’ve mentioned before I like to think that crashes are like sales and all the good companies have just become a bargain!
If you’ve got five or more years to wait it out then I would definitely be buying into those companies with strong fundamentals. And if you want to earn a bit of cash over this time while you wait make sure that they also have a good dividend yield.