Should I Sell My Stocks?

How Do Stocks Work?

Before we unpack the details of holding and selling stock, let's quickly recap how stock investing works. Stocks are investments that represent shares of public companies. By owning them, you have some degree of equity (ownership) in those organizations. Being strategic about buying, holding and selling stocks can help position you to net the best possible returns.

If you sell stock after prices have gone up, you'll turn a profit (as long as your gains outweigh the taxes you pay on them). If stock prices are on a downward trend, you may choose to sell as a way of cutting your losses. It sounds pretty cut and dried, but trying to figure out when to sell can feel daunting. After all, no one can predict the future: Stock that was on an upward trend when you sold could maintain its trajectory, meaning you miss out on additional gains. But selling a plunging stock that never recovers could save you at least some of your initial investment. It comes down to weighing the potential reward against the built-in risk.

How to Decide When to Sell a Stock

The exact right moment to buy or sell stock is far from a science. Panic selling in the face of market volatility could leave you missing out on future returns. Over the past decade, the average annualized return for an investment portfolio made up of 60% stocks and 40% bonds has been around 10%, according to investment research company Morningstar. Future performance is never guaranteed, but history does point to the potential benefits of riding out turbulent markets.

There's no perfect formula for deciding when to sell stock, but below are some scenarios that might nudge you in that direction.

The Company's Outlook Has Changed

All kinds of things can affect a company's expected performance. A scandal, negative earnings report or uncertainty within the industry can be enough for investors to question a company's future profitability. When Chipotle suffered an E. coli outbreak in 2015, the company's share price dropped from $757 to $480 in a matter of months. These days, shares are trading for over $1,600. It speaks to the unpredictability of stock investing.

The Company Is Acquired by Another Organization

Stock prices might spike if a smaller company is acquired by a large conglomerate that can breathe new capital into the organization. That could be a win for investors who got in when stock prices were low. If you own stock in a company that's being bought out and you're looking to offload some, you might consider selling soon after the offer goes public. This is typically when share prices go up.

There's a Misalignment of Values

Some investors strategically buy into companies that share their values, whether that's around environmental sustainability, social issues or corporate governance. You might consider selling stock if a company is operating in a way that conflicts with your values. If so, you're not alone: 85% of individual investors are interested in sustainable investing, according to a 2019 Morgan Stanley survey.

The Stock Never Lived Up to Your Expectations

Not every stock is a winner. Despite your research and gut instincts, you may have invested in a company that simply fell short of your expectations—or worse, is on the road to bankruptcy, which could render your stock shares worthless. Selling stock can be a way to prevent further loss.

You Need to Balance Your Portfolio

Investment portfolios are typically made up of a variety of assets. This can include stocks in different sectors and countries, as well as bonds and other securities. The value of your asset classes can change over time with normal market activity. Your long-term goals, retirement timeline and risk tolerance might also evolve. As a result, your portfolio can become lopsided, holding a large number of investments that may no longer suit your needs.

Rebalancing is one way to rightsize your asset allocation. A financial planner may advise selling some well-performing holdings, then directing the profits toward underperforming asset classes.

A Financial Situation Requires You to Liquidate Stock

Financial emergencies come in all shapes and sizes. If you've depleted your emergency fund and don't have other sources to pull from, liquidating stock may be your best option. This usually involves taking a strategic approach that considers your retirement timeline and long-term goals.

You Have Something Potentially Better to Invest In

Selling stock might free up money you can then use to invest in something you're more excited about. This can include everything from real estate to a new business.

When Should You Sell a Winning Stock?

Choosing the right stock to sell is a process all its own. Paper gains, which refer to potential profits you could net later down the road, are very different from actual gains realized when you sell stock. The idea is to offload overvalued stock, though making that determination is often complex and isn't an exact science. Morningstar recognizes two schools of thought for determining the value of stock holdings:

• Relative valuation: This method measures how a stock is performing relative to its competitors. Price-to-earnings ratio is a valuation metric that's often used here. It divides the current stock price by its per-share earnings. If a company has a P/E ratio that's lower than its competitors, that could suggest that it's undervalued.
• Absolute valuation: This is a process that can help determine a stock's intrinsic value. It's essentially a nod to how much the stock is truly worth and should be trading at. Instead of comparing the stock to its competitors, absolute valuation focuses on the company's assets, cash flow, balance sheet and other key internal indicators to determine its true value.

Valuation methods aside, you may have purchased some stock with a target return in mind. If you've met or exceeded that benchmark, that might play a role in your decision to sell. It's something to consider alongside P/E ratio and other valuation approaches.

Consider Working With a Financial Planner

If you're not comfortable assessing a stock's valuation and other complex investment strategies on your own, consider seeking help from a professional. An experienced financial planner can help you create an investment strategy that's aligned with your risk tolerance, as well as your short- and long-term financial goals. Most will consider your financial big picture, then guide you in terms of holding or selling stock.

How Much of Your Stock Should You Sell?

When deciding how much stock to sell, think first about your motivation to liquidate in the first place—and remember that it isn't an all-or-nothing game. You can sell smaller numbers of shares gradually over time.

If you're hoping to realize gains, selling a certain percentage of high-performing stock could translate to a worthwhile payout. You can then pocket the profits or redirect them to underperforming asset classes to rebalance your portfolio. Just keep in mind that you could also be cutting yourself off from future gains.

One other thing worth mentioning is that you'll be on the hook for capital gains tax on any shares you sell for a profit. Understanding how the taxes you'll pay will cut into your earnings is an important consideration.

The Bottom Line

Selling stock can have a ripple effect that impacts other areas of your financial life, especially if you're counting on stock returns to help fund your retirement. Again, connecting with a skilled financial planner can be a great resource.

Having a strong financial foundation can also help you weather the uncertainty around investing and other money matters, including knowing where your credit stands. Experian provides free access to your credit score and credit report to help you understand the role debt plays in your financial actions.