WHEN IS THE BEST TIME TO SELL STOCKS?

You’ve invested time and much of your savings into your portfolio.  You’ve carefully and painstakingly made the best choices you could for the stocks that you own.  The stock market has shown you that it does not always co-operate with your carefully laid plans.  Is it the right time to sell?

Good Entry Points:  To “buy low and sell high” you must first buy low.  This would mean that any useful strategy might well depend on achieving good entry points for equity positions.  In many cases, stock gains and losses are determined when you buy—not necessarily when you sell a particular security.  How can you recognize a good entry point?  Technical analysis is the best approach.  When a stock has bounced off a recent low, it could mean that the low price represents a support level, and other buyers are ready to step in.  As the stock moves up, the trend becomes more apparent and would be confirmed as it reaches a certain rudimentary level.  This rising trend in its early stages is what to look for in a good entry point.  One analyst called it a “coffee cup”, as the chart pattern appears to show the outline of one.  The handle is the previous stable point before a drop, a smooth bottom follows, and then a rise back up to the handle and above.

Taking Profits:  This term is often used by advisors as they explain their decision to sell.  If a particular stock has made a gain from its entry point, but appears to be reaching a top or resistance in its upward trend, then selling to collect the gain may be the right move.  The resistance point would mean that the trend has, or is about to, top out at a level equivalent to a recent high.  A decision must be made, as the overall market might still have legs and the particular stock could continue up.  But when the current rising trend plays out, it’s often a good time to sell, even if it means leaving some money on the table.

Dividends Only:  An income investor who is interested in maximizing dividends will need to pay close attention to a stock’s fundamentals, as the single event that can hurt the stock’s value might be a cut to the dividend.  Corporate managers of dividend bearing stocks usually strive to maintain their dividend payouts even when revenues and profits show that a cut to the dividend should be made.  Technical considerations should not be ignored, but if the stock is fundamentally sound and there appears to be no threat to the dividend, holding the stock through a pullback may be the best thing to do.  Once the pullback is over, many dividend paying stocks rise back up to their previous levels.  But when it becomes clear fundamentally that the company could have trouble paying its dividend, it becomes a clear sell signal. 

When the Price Falls:  Regardless of strategy, if the market tanks as it did in the early Covid-19 stages, the best advice would be to sell, sell, and sell again. Also consider shorting stocks most affected, as a sharp market movement overwhelms all technical and most fundamental considerations.  As a general rule, private investors should not sell after a stock market selloff—the time to sell is before the selloff or as close to its early stages as possible.  Then when the market settles at the bottom, the investor would be sitting on a large stack of cash, and should be poised to go back in and take advantage of the extraordinarily low prices.  But outside of a major correction or bear market, the decision to sell is not so simple.  Most advisors will put a sell signal up for a stock that declines in the 12 – 15% range.  Others put this number at 8 – 10%. Depending on a number of factors, private investors should consider selling when the downward trend points to a pullback of about 15%.  It’s should be a hard decision to make, as investors don’t buy stocks only to sell them for a loss.  However, there are often other mitigating circumstances that require selling, including a bad entry point.

Setting Sell Stops:  A useful tool to protect capital is to set predetermined sell stop orders for those stocks that are showing downward trends.  When the price drops to the sell stop price, the order becomes a market order and will execute.  This does not guarantee that the sell stop price will be the actual price the security sells for, but it will automatically liquidate the position without any other input.  Sell stops should not be universally applied, however, as they could generate unnecessary short-term losses.  They can be very useful after a stock has climbed from its entry point to a satisfactory gain. If a fledgling acquisition fails to move up at all, good advice might be to avoid setting a sell stop and just sell it when it declines to 8 – 10%.  Each investor just come to grips with the idea that some acquisitions were not good ones.

Tax Purposes:  When year end tax-time comes around, some investors will review positions in their portfolios that have been lackluster over a long period of time.  It might be good advice to get rid of some of these investments to offset some of the gains of the year.  If there are no substantial gains that were liquidated during the year, the late losses can be rolled over to the next year to be matched against future gains. 

Conclusions:  It is the good entry point which propels the stock into the money and keeps it moving in growth mode.  The decision to sell is often not an easy one, but should be done under certain circumstances as described to protect the investor’s capital.