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When is it time to sell a stock?

Image: The Motley Fool Editorial.

It’s very easy to buy a stock. After conducting as much research as you believe is required, opening an online brokerage account only takes a few days and after that, all you need to do is click buy

Buying shares is easy but selling them is a different matter altogether. Deciding when to sell an investment is possibly the hardest part of investing. Indeed, there’s no precise science to selling. Even if you have an exact entry and exit plan (or target price), the market will always try and derail your investment thesis. 

Many long-term buy-and-hold investors won’t have a plan in place to sell a specific holding if it reaches a certain price. Having a plan is the Foolish way of investing. But even with a plan and even if you’re a long-term investor, you need to considering dumping an equity holding if the investment thesis changes. 

Time to change

If you’re investing a long view, you need to be sure the company and its management can be trusted to act responsibly on your behalf as a shareholder of the business. Without this confidence in management, investment becomes more akin to speculation as you’re no longer investing in a company you believe in, but instead speculating on the stock price. 

If you can no longer trust management to act in your best interests as a stockholder, it could be time to sell up. If management lies, consistently fails to meet targets, takes bloated pay packets in the face of deteriorating business performance, or chases growth at any price, it could be time to get out. 

Another reason to sell a long-term holding is if the original investment thesis no longer stands. Even if you’re a buy-and-hold investor, every so often you should take time to evaluate your holdings against your original investment thesis to see if it’s still valid. Over the past decade, company lifespans have dropped dramatically thanks to increasing competition. This means businesses that may have looked to be perfect for patient investors a few years ago are now facing multiple threats, falling revenue and a bleak outlook.   

Another threat to a long-term company outlook is the structural decline of an industry. The difference between a cyclical downturn and structural decline is usually determined by how long the downturn lasts. Newspaper circulation for example, has been in decline for decades so it’s clear the industry is suffering a structural decline. 

When not to sell

Deciding when to sell a position isn’t a precise science, but the signs above can be an indication that it’s time to give up on your holding. Unfortunately, you do need to put in some work to discover when these signs emerge. In this business, you won’t see a big red flashing warning light as soon as a holding no longer meets your investment thesis. 

Make money, not mistakes

A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions. 

To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.