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. 

The post Want to become an ISA millionaire? Know when to sell shares! appeared first on The Motley Fool UK.

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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.

That said, there are some — but only a few — perfectly rational reasons to sell some or all of the shares held in this kind of account.

1. “I’ve hit my goal!”

Investing involves taking a long-term perspective. But ‘long term’ is not ‘forever’ — there should always be a point at which you reap the rewards from having the patience to grow your wealth slowly. That’s why financial goals are so important.

We will, of course, vary on what we’re shooting for, be it saving for retirement, a child’s university fees or travelling the world in style. Bereft of a target or two, you’ll never know when the time definitely is right to bank profits and leave the party.

If I manage to hit a goal in 2020, I won’t be afraid to sell and celebrate.

2. “I’ve picked a loser”

Not every stock you buy will work out well. Indeed, finding more winners than losers over your investing lifetime is an achievement in itself! 

Selling an underperforming investment can be wise but only once you’ve ascertained why it’s doing so badly. Is the share price drop due to investors falling out of love with a particular industry or something specifically to do with that company? If it’s not doing worse than its peers and there are no other red flags, it may be best to hold on. 

Fortunately for passive investors, none of the above applies. Since index trackers and exchange-traded funds generate almost exactly the same returns as the market once costs have been taken into account, there can be no underperformance as such. So selling just because markets are down is almost always going to be a mistake and one I’ll be avoiding.

3. “Disaster has struck!”

Sometimes, the reason for selling stocks has nothing to do with performance at all.

Unfortunately, not all expenses can be foreseen. The car that ‘never lets you down’ suddenly develops every fault imaginable; the job you’d never considered leaving is suddenly taken from you.

While there’s no way of predicting what’s to come with any certainty, you can take the sting out of any unpleasant surprises by building up an emergency cash fund. If you haven’t got one already, I’d make that a priority in 2020 so that you can avoid selling any investments and interrupting compounding unnecessarily.

If, however, you find that your cash savings can’t cover the cost of something, consider ways of making up the shortfall. My personal favourite is flogging clutter on eBay.

One last thing…

As you may have gathered, I’m not a fan of selling the stocks I own on a whim. Even two of the three ‘sensible’ reasons for doing so can be avoided through planning and research. This being the case, I’m hoping to do as little as possible to my ISA portfolio next year. 

This includes not reacting to the latest geopolitical event. As those who backed out of stocks on renewed concerns regarding our EU withdrawal in December 2018 and didn’t return will know only too well, it’s time in the market that matters, not timing.

The post 3 reasons I’ll be selling my ISA stocks in 2020! appeared first on The Motley Fool UK.

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• How many Legal & General shares does it take to match the State Pension’s £12,547 income?
• What on earth’s happening to Babcock, Rolls-Royce and BAE Systems shares?
• Will Tesco shares plunge in May or June? This latest news spells trouble…
• How scared should investors be about a stock market crash? I say, not at all

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I’m not going to dwell on those reasons today. Instead, I’m going to suggest three questions investors should ask when it comes to selecting which stocks should be dumped first. 

1. Has the story changed?

It can happen that companies which seemed great buys a few months/years ago have come unstuck.

Perhaps the technology they sell is now outdated and demand has dropped accordingly. Perhaps the firm has become complacent and a competitor has started to steal market share.

Perhaps a promising new product has failed in tests, or the next-big-thing isn’t quite as groundbreaking as management once suggested. Perhaps a new, highly motivated CEO is taking the firm in a direction you believe could actually damage its long term future.

Whatever the reason, it can sometimes be best to sell out and look for a more secure home for your cash. As the great economist John Maynard Keynes is rumoured to have remarked, “When the facts change, I change my mind. What do you do, Sir?“

2. Will things really get better?

As painful as it can be to ditch a company you once believed in, it can often (though certainly not always) be right to do so. Some stocks never, or are very unlikely to, recover. Think Carillion or Debenhams or, more recently, Thomas Cook. 

The question is, how big should you allow your losses to get before pulling the plug? Although this is very much down to personal preference, many investors allow their holdings to dip 20% in value before selling. There’s a mathematical reason for this. 

If a stock you own falls by this percentage, you’d need it to regain 25% to break even. That’s possible, but it’s also a challenge. In the meantime, you could be invested in a company with a far brighter future. 

If your investment is down by 40%, you’d need a gain of 67% just to get back to what you paid for it. If you’re down by 50%, you’ll need the stock to double in value. You get the picture.

3. Are directors selling?

I’m heartened when I find a company where senior management owns a large proportion of its shares. Theoretically, those with lots of cash tied up in a business should work harder to make it a success. 

I’m somewhat less impressed when I see them dumping amounts of said stock on the market. There are, of course, legitimate reasons for these sales. A new home or a costly divorce bill being two examples.

Since the seller is unlikely to give his/her reasoning, however, it’s better to look for two things. The amount they are selling relative to their overall holding and whether other members of the board are following his/her lead.

But a leader drastically reducing their stake could indicate concerns about the future of the business. Even if none of the above apply and the manager is simply taking a profit on their investment, the sale sends a message that they now consider the company to be over- or at least fairly valued, and any upside in the near term could be limited. 

The post 3 vital questions to ask before selling an investment appeared first on The Motley Fool UK.

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• Apple stock rises after stellar earnings! I’m getting buying vibes
• How many Legal & General shares does it take to match the State Pension’s £12,547 income?
• What on earth’s happening to Babcock, Rolls-Royce and BAE Systems shares?
• Will Tesco shares plunge in May or June? This latest news spells trouble…
• How scared should investors be about a stock market crash? I say, not at all

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

This is all very well, but as an investor myself, I know it’s difficult to stop yourself from hitting the sell button after a stock has fallen 20%, 30% or even 50%. 

So, the question is, when should you sell a stock?

When is the right time to sell?

Well, some investors will say a 20% decline is enough to make them sell, which is all very well, but attempting to time the market like this can significantly hold back returns over time (something I’ve written about before). 

Unfortunately, there’s no simple formula to know when to sell, you have to figure it out for yourself. One way of doing this is to keep a record of why you brought the share in the first place. 

Indeed, if you make a note, or maintain a log of the reasons that led you to consider a given stock and which of those reasons you found most compelling when these conditions change, you’ll know whether the entire thesis behind your purchase proved to be incorrect. If so, it’s at this point that you’re given your first warning that it could be time to sell.

Another reason to sell could be as simple as you’ve just found something better. It’s imperative to keep your emotions and the stock market separate. You see, stocks aren’t people, and it’s perfectly OK to sever your ties with one and become friendly with another. That said, this approach can be damaging to your wealth if you chop and change too much. If you’ve made an investment with a particular thesis in mind, wait for this thesis to play out. If it becomes clear that the company won’t be able to achieve what it promised, it might be time to move on. 

When not to sell 

Deciding when to sell isn’t a precise science, of course. As any experienced investor will tell you, chances are you will sell at the wrong time. Stocks you sold thinking they would fall further will rise, and stocks you sold believing they wouldn’t gain much more will continue to head higher. But that’s just part of investing. 

However, one thing’s clear: you shouldn’t sell just because the market is falling. Remember, shares aren’t just a lottery ticket to wealth, they’re an ownership interest in a business. The share price is just a marker of what someone is willing to pay for a share of that particular business at that specific point in time. 

The post When Is The Right Time To Sell A Stock? appeared first on The Motley Fool UK.

More reading

• Apple stock rises after stellar earnings! I’m getting buying vibes
• How many Legal & General shares does it take to match the State Pension’s £12,547 income?
• What on earth’s happening to Babcock, Rolls-Royce and BAE Systems shares?
• Will Tesco shares plunge in May or June? This latest news spells trouble…
• How scared should investors be about a stock market crash? I say, not at all

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.