How to Decide When to Sell a Stock

Many investors are unable to sell a stock; either they 'fall in love' with an investment, or are unwilling to admit a failed investment. Sell decisions should be made at the time of an investment.

Steps

1. Concentrate on selling stocks within your portfolio that are doing poorly, particularly if you cannot satisfactorily explain the loss as mere market emotion or an overreaction to a particular problem. William O'Neill compares a portfolio to a garden, you need to pull your weeds and not your flowers in order to have a profitable 'garden'. But do not allow growth in particular kind of investments that have done well in the past to unbalance your portfolio; rebalance it among companies and asset classes from time to time.
   
2. Consider setting a limit on your losses. Some CANSLIM investors use an 8% loss limit. This prevents small losses from becoming large disasters.
   
3. Consider selling small portions of your successful investment at previously decided appreciation targets. This will cover your losses from unsuccessful investments and will also 'lock-in' profits.
   
4. Admit mistakes quickly, and get out of investments that have fundamental problems develop.
   
5. Avoid becoming emotionally involved with your investments. Consider that all paper losses are real losses and all paper gains are real gains to provide you with the proper perspective. Avoid 'denial' that prevents you from a successful trade.
   
6. Consult with your tax professionals to determine if the timing of a sale should be performed to maximize or minimize the tax effects. In general, make your trades based on the portfolio rules you have established; allow taxes to be determined separately.