A Few of the Finer Things - November 2018

When to Sell Your Stocks

We are once again leaning on our friend Carl Richards (@behaviorgap) for some sage advice on a very difficult topic.

How do you know when it’s time to sell?

Psychology plays a huge role in making the decision to sell. History is littered with examples of people who made horrible financial decisions because of greed or other bad behaviors.

So if you find yourself in the enviable position of having chosen a few winning individual stocks, how do you make the decision?

First, it’s often better to be lucky than smart.

As you’ve watched a stock's price go up, did you make the decision to invest because you’re smart, brave, or just lucky? If you’re being honest, most people would acknowledge that when you pick an individual stock or two and they subsequently triple in price, that outcome is more often than not a result of luck and not some inherent skill.

Second, review how these investments fit within the context of your financial life.

Choosing to keep an individual stock just because it went up does not qualify as a valid reason. So when you’re asking the question of whether it’s time to sell, take a step back and consider the following:

1. Clearly identify your financial goals.
   Get out a piece of paper, and write down what you want the future to look like. Don’t spend hours or days on this task. Give yourself some slack. It’s life, after all. Things will change, and it makes sense to revisit and redefine your goals periodically. But you have to start somewhere. These goals really are nothing more than educated guesses, but they’re at least a set of markers in the sand, something you can use as a reference point for your decision-making.
2. Make a plan to get there.
   Again, don’t spend too much time here because the variables that go into building a plan are nothing more than guesses. Still, the process is important. Using the information you have, estimate how much you can save for the next 36 months, make a guess at the rate of return you hope to earn, and carefully consider what risks you’re comfortable taking.
3. Decide if your current investments fit the plan.
   Maybe they do. Maybe they don't. I don't know. But if you look at your plan, you will.
4. If the investments don’t fit, sell!
   Now, you need to be prepared psychologically for what that means. I can promise you that if you make the decision to sell an investment, the stock will triple over the next couple of months after you sell. Vice versa, if you make the decision to hold an investment, of course it will lose 20 percent of its value over the next three months. That’s just Murphy’s Law. That’s how this works. But as frustrating as that can be, you have to stick with the plan.

Making the decision to sell or hold an investment is relatively simple when we’re aware of the cognitive traps of fear and greed. It should be clear to anyone that if you own an investment that has tripled in price, and you made that investment based on luck, it would be wise to take some of the profit and go home.

Investment decisions like buying or holding are best made when you do so in the context of your financial goals. Picking the next Apple is not a financial goal. Saving for retirement or having enough money to send your kids to college are financial goals. Once we’re clear about the why, our goals, and we have a plan to get there, making investment decisions becomes much more simple.

CARL RICHARDS is the creator of the Sketch Guy column in the New York Times.

– Gary Weiss and Kelly Hughes, November 2018