Want to become an ISA millionaire? Know when to sell shares!

Holding quality shares in a tax-efficient ISA increases your chances of becoming rich. So too does knowing when to sell your duds.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Here at the Motley Fool UK, it’s our belief that buying high-quality shares and holding them within a tax-efficient ISA can dramatically improve your wealth. With a bit of patience, you could even become a stock market millionaire.

Notwithstanding this, there will very likely be times in any investment career when it makes sense to sell a stock. Here’s are three reasons for doing so.

The story has changed

It’s remarkably easy to fall in love with a particular share, particularly one you’ve devoted time to thoroughly researching.

Sadly, nothing is guaranteed in the market, regardless of how good the company’s story is. Today’s dream stock can quickly become a nightmare if events (internal, external, or both) go against it. The key is learning to distinguish a major setback from a temporary hurdle.

One might argue that the investment case for travel stocks has dramatically changed in 2020 due to the pandemic. Even when the coronavirus cloud does finally lift, some companies’ share prices may remain stagnant for a long time afterward due to the financial damage they’ve endured.

A good example from a different sector would be Lloyds Bank – one of the most popular stocks with retail investors.

Despite making it through the financial crisis, anyone backing the shares in March 2009 won’t have made much money since (dividends excluded). Had they switched to technology stocks, however, the outcome would have been very different.

The price is too high

Great shares are seldom without friends and rarely cheap as a consequence. What’s more, the very best of the best just go on getting more expensive as they continually beat expectations. This explains why top UK fund manager Terry Smith thinks there are more important things to focus on than the price you pay for a stock. 

Then again, there will be times when a share price becomes so utterly detached from a company’s fundamentals that taking at least some money off the table feels like the right thing to do (especially as you won’t pay tax on capital gains if it is held within an ISA). An example of this might be when a company is hyped beyond belief but has yet to make a profit.

Even if a stock’s prospects really are great, it will take time for these to be realised. Will all investors be prepared to hold and wait? I doubt it. 

You’ve made a mistake

Few active ISA investors are able to strike it rich without making a few/a lot of mistakes along the way. This may be the result of acting too cautiously, recklessly, or simply picking a stock that didn’t work out.

Regardless of the reason, admitting that you’ve made a mistake can be hard. This is why we cling to losing stocks even when there’s little chance of recovery. Even if a company is able to turn things around, the numbers might still be against you. Being 50% down requires a share to double in value just to get you back to break-even.

Now, that sort of move isn’t impossible, particularly in illiquid small-cap stocks, but it can take a while if it comes at all. In the meantime, other companies are making great money for their investors.

The opportunity cost of staying invested in a loser can often be greater than accepting the loss and learning from it. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Abstract bull climbing indicators on stock chart
Top Stocks

4 FTSE shares Fools think will lead the next bull market charge

Will shares in these FTSE-listed companies be among the biggest winners during the next market upturn? These Fools are confident!

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »