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When’s the best time to sell your stocks?




Whether you’re enjoying a stock price surge because of a bull run or suffering from losses because of price drops, one question is certain to pop up: When should you sell your stocks?

During bullish periods, the problem with investors experiencing unprecedented price appreciation is that they are unable to control their greed. Their stock may already be up 20%, 50% or even 100% but they still don’t want to sell because “I want more.”

Similarly, those already suffering from losses due to price declines still don’t want to sell because they do not want to face the harsh reality that they have lost money. They continue to believe that the stock price will return to previous levels. This may be possible but, in some cases, the loss could remain after several years.

So when’s a good time to sell?

Based on our experience, a good time to sell is when the target price or expected profit has been achieved or an acceptable level of loss has been reached.

Let us explain these three scenarios.

1. Target Price reached

Many traders and investors buy stocks with a predetermined target price. This value may be computed using valuation models such as the Dividend Discount Model, Free Cash Flow to Equity, Free Cash Flow to the Firm, or the Price Multiples Model, among others. Some, however, merely rely on rumored target prices or prices told to them by their brokers.

Either way, lock in the profit by selling your stock upon reaching the target price.

In July 2010, for instance, I bought shares of Unionbank of the Philippines (UBP) at P45.50. My target price then was P60.00. Upon hitting the price, I unloaded the stock. It did rise further to P64.00 but I did not regret it. Now the stock is trading at P58.00. The key, I discovered, is in managing expectations and in managing greed.

2. Target Profit percentage met

In stock market bull runs, stock prices break out then continue to rise indefinitely.

For example, I bought Megaworld (MEG) shares at P1.26 back in May 2010. My target upside then was only 41% (based on a Target Price of P1.78), but by November 2010, its price has reached P2.54, a price increase of 100%+.

Honestly I was unable to control my greed after seeing the price breakout. Despite doubling my money and reaching the target price, I still wanted to hold on to the stock. But last week, stock prices began to tumble.

That’s when it hit me: I should stick to my target profit percentage. I decided to sell MEG at a price of P2.40, locking in a 90% profit.

3. Cutting your losses

When stock prices fall, investors usually overestimate the market by believing that prices will return to previous profitable levels. Sometimes they do in just a matter of days, but in most cases, it takes months or even years before prices bounce back. Investors are then stuck with a loss they don’t want to realize.

Save yourself from more misery by setting up a stop-loss order or by selling a stock when a target loss percentage is reached.

For example, in September 2010, I bought AgriNurture Inc. (ANI) stock at P15.50. In recent weeks, prices have drastically fallen. At P12.50, my ANI shares have already lost 20% of the value. That’s when I decided to let go.

Yes, it’s tough to sell at a loss and realize a 20% price reduction. But if I think prices will not return to past levels in the short run, I better cash out and transfer my money to another stock that could make me money.

I know someone who bought a stock right before the 1997 financial crisis. He decided to wait it out and still held on to that stock until today. Guess what? Only this year has the price returned to its pre-crisis level! That’s a long 13 years of waiting! That’s money that could have given him interest during the past 13 years had he invested it in, say, time deposit or bonds.

Conclusion

In summary, to profit in stocks, one should learn when to get out.

If you’re winning, lock in the profit and don’t look back. Don’t regret if ever you sold a stock whose price still rose consistently. At least you already pocketed actual money.

When you’re losing, cut your losses and move on. Better to realize the loss now so you can transfer those funds to another stock that could possibly deliver you profits.

Plan an exit strategy. That’s as important as your buying strategy.


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8 thoughts on “When’s the best time to sell your stocks?”

  1. peter says:

    actually you make more money when you sell your stocks at a profit margin of 6%. stocks of some companies go up and down 6% in a matter of weeks. if you have a principal of P100,000 in stocks then that means P6,000 earnings in a month. that in itself is better than putting your money in a td or sa. you get 2%-4% per annum in a bank!

  2. cat says:

    I just learn about this stock investing, esp the cost averaging.
    My goal is to unload in 15-20 years.

    Did you invest similarly in a long-term?
    With your five years investing, can you say what they call “cost-averaging” can be felt?

    TIA

  3. johnnybravo says:

    finally, welcome to PMT! i am sick and tired of reading believers and non believers of GOD! hoping this is a jumpstart to talk again about various investments etc.

  4. Jay Castillo says:

    Thank you James for this very helpful article. Is there a way to setup an AUTOMATIC stop-loss order?

  5. randy says:

    what is the best way to choose stocks? what are the criteria you are looking for to invest on certain stocks?

    Thanks.

    Randy

  6. martin says:

    my portfolio is down about 20%, i just started buying almost 2 mos now and bought aggressively in the property sector. Of all the stocka I bought only BEL and LR are picking up. I am kinda nervous but deep down I know MEG, SLI etc will rebound soon.

  7. abie says:

    i got approve in in citiseconline and maybe next year ill start buying stocks.

  8. Geld says:

    I bought stocks of a large bank in the Netherlands during the crisis. Because the government wouldn’t let the bank go broke, stock prices are almost 300% up for that bank. I sold my stocks a few weeks ago, cashing in some nice profit :)

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