When To Sell Shares: What You Need To Know

There are an abundance of information available on when to buy shares, but details on when to sell shares remains comparatively underrepresented.

During the earlier stages of my investing journey this was a dilemma that I was faced with. Despite poring through numerous books, they only contained information of when to acquire shares. There was little attention of when to divest your interests.

Consequently, I looked through online resources in search for answers. But I encountered another hurdle , as my concerns remained unaddressed by the available resource.

Throughout the years of investing in the stock market, I realised that when to sell is of little importance. Which could explain why most books rarely explain when to sell shares to a great extent.

Regardless of that fact, I understand the importance of at least knowing when you should sell your shares. You should also consider that not all investors are the same and what drives their investment decisions differ from you.

The psychology of selling is a lot tougher than when it comes to buying.

Below I will share with you my thoughts of when to sell shares, when not to sell shares and why you should never sell.

When To Sell Shares

Arguably the top reason why you should sell your shares is when your thesis is broken. Unless you have been buying shares from recommendations, you should know why you invested in the first place.

Publicly listed companies are obligated to update investors of any market sensitive information through company reports. You can monitor the company’s performance and decision-making through these documents.

Should a circumstance arise whereby you encounter an unfavorable deviation from the reasons that initially motivated your investment decision, it may be deemed an appropriate time to divest.

Secondly, you should consider selling investment in companies that you solely bought on grounds of valuation. By this I mean companies that you have purchased only because they were trading below their fair value.

Larger companies that have grown too large that their growth reflects the rate of inflation or GDP falls within this category. Your returns from these companies are more sensitive to valuations.

The main driver for selling these shares would be that the price of the stock has surpassed the intrinsic value. There comes a point where selling is the most rational decision. These decisions are far easier to make for more established companies with predictable cash-flows.

Thirdly, you may consider selling for portfolio re-balancing purposes. You may face times when a company in your portfolio has appreciated, making up a considerable weight in your portfolio.

This is a sensible action to manage risk. However it is not one that causes me to sell which I will explain further below.

When Not To Sell Shares

Knowing when to sell shares is important, but knowing when not to is equally important. If you have recently started investing in the stock market, you will know that it is volatile.

If your investment journey began shortly before March 2020 you will have witnessed that the stock market is susceptible to rapid and substantial fluctuations. Both in the downward and upward directions.

Which brings me to the first reason not to sell shares, and that is when everyone around you is selling. Those that sold during the March 2020 crash, completely missed out on its incredible recovery.

Being too smart and timing the market may have saved investors from making large losses. However, these loses would have been temporary, providing the business you invested in had not fundamentally changed.

These same investors may have contemplated reinvesting when market conditions became more stable. However, to their chagrin, the stock market went on to achieve record highs even prior to the world normalizing.

Secondly, is to realise quick profits which I have done in my first year of investing to my demise. Due to my naivety, I took a profit when a share I invested in went up 100% within months. Estatic with my decision, it later continued to rise another 70%. Since then I have not been able to bring myself to repurchase.

Thirdly, is in regards to portfolio re-balancing. As previously mentioned, although I do not divest for the sole purpose of rebalancing, some investors opt for this approach. Personally, I continually add to my portfolio monthly. I prefer to allocate capital to other positions allowing the portfolio to achieve “self-rebalancing“.

Why You Should Not Sell Your Shares

We have all heard the phrase, “You can’t go broke taking a profit”. But you also can’t accumulate considerable wealth by taking a profit.

That is the dilemma that you will be constantly faced with. Stocks have the potential to create enormous wealth of you buy the right business. But if you sell that stock too early you disrupt that power of compounding.

As Peter Lynch once stated, there is a tendency for most investors to prune their flowers while allowing the weeds to flourish. Although realizing a profit has the potential to mitigate the downside risk, it also has the effect of placing a cap on the investment’s growth potential.

If you have devoted significant effort towards the research process, when to sell your shares should be of minimal concern. This is provided your thesis remains true, thereby allowing for substantial compounding of investments.

It is worth noting that when a substantial loss is experienced in an investment, investors are faced with a decision. No investor has a perfect strike rate, and it is expected that several investment decisions will not be favourable.

In the event that your thesis is broken, it is highly recommended to sell the investment at a loss. However, there may be instances where even a 90% or 100% loss may not be advisable to sell.

Assuming that you have allocated your capital efficiently and your portfolio is diversified, a significant loss will not necessarily wipe out your entire portfolio. There is a high chance that other stocks in your portfolio will offset any losses and generate returns.

Ultimately, what truly matters is the overall returns of your portfolio, not individual returns. Even Amazon suffered a 90% loss in value during the Dot-Com crash in the early 2000s. Selling the stock back then would have been a mistake, and there were opportunities to repurchase later on, which many failed to do.

Key Takeaways

• You should sell shares when your investment thesis is broken or when valuation surpasses intrinsic value. Consider re-balancing portfolio to manage risk.
• Avoid selling based on market trends, timing, or quick profits. You are able to re-balance your portfolio without solely selling, assuming you are regularly contributing to your portfolio.
• Selling stocks too early can limit growth potential. However, selling at a loss may be necessary if your investment thesis is broken. Overall portfolio returns matter more than individual returns.

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