Unloading stocks can often feel like a high-stakes bet. Imagine selling off 100 shares from your XXX Corporation stash at $60 each, only to witness the price catapult to $75 per share in a matter of weeks after your transaction. It might feel like a lost opportunity. However, in the grand scheme of things where stock ownership is a long-term investment, rather than a ticket to instant wealth, your concern about XXX's performance would dissipate. Instead, your attention would be riveted on discovering other profitable investment avenues.
The reality is there's no universally perfect time to sell stocks. The decision largely depends on individual situations where selling might or might not be beneficial. Below, we've highlighted seven scenarios when you might contemplate selling your stocks.
The Persistent Underperformer
Suppose you've invested in XXX Corporation four years ago, fuelled by optimism about its potential. Over time, however, the stock's performance has been disappointing, particularly in comparison to its industry peers. It might be prudent to cut your losses, offloading the XXX stocks, and averting future potential setbacks.
There can be various reasons for a stock's continual underperformance, and most of them could be beyond your influence. The New York State attorney general’s office cautions that factors like declining company revenue or poor management could lead to a fall in stock price.
Furthermore, a share price might drop due to large-scale selling by a significant investor, or adverse events impacting the entire sector, as seen during the Dot Com bubble burst.
Capitalizing on Tax Loss Harvesting
Selling a stock that's underperformed has its silver lining. You could use a strategy called tax loss harvesting, which could potentially minimize your tax liability. When you sell a stock, only net profits are taxed as per capital gains tax rules. However, if the selling price is less than what you paid for the stock, it results in a net loss, which can offset your capital gains taxes. In the given scenario, the loss from XXX could counterbalance the capital gains from other profit-making stock sales.
In situations like assembling funds for a down payment on a house or managing sudden, large medical expenses, you might be forced to liquidate some of your stocks. You can park the proceeds from such a sale in a high-yield savings account if you don't need the money immediately. This approach not only continues to earn a return on your funds but also safeguards it from stock market volatility.
Cashing in on the Gains
You might be content with your investment portfolio's overall performance or apprehensive about a looming economic downturn impacting your stocks. In these cases, selling the stock and securing the profits could be a sensible move.
However, it's important to note that attempting to predict and outmaneuver market trends ahead of a potential economic slowdown could backfire. A longer-term investment strategy built on the historical resilience of stock prices might be a more reliable approach.
Sector Rotation Strategy
Suppose you hold stocks in a sector that was previously flourishing but is now witnessing a downturn with an unpromising future outlook. In such a situation, it might make sense to sell the stock and reallocate your investment into a sector with a more promising outlook.
However, thorough research should precede such a move. It's crucial to evaluate the severity of the downturn in the current sector and compare the future prospects of the alternative sectors before making a decision.
Your portfolio might need a facelift based on stock market fluctuations. Rebalancing your portfolio involves adjusting your asset allocation to align with your financial goals and risk appetite.
For example, if you notice that the tech sector, constituting 25% of your portfolio, is not performing well and its recovery is predicted to be slow, you might choose to reposition your assets. You could reduce your tech stocks' share to 15%, increasing healthcare and financial services stocks to 20% and 10%, respectively. This adjustment diversifies your risk and aligns your portfolio more closely with your financial goals and risk tolerance.
The Absence of Dividends
Dividends provide a steady income stream in the form of cash or additional stock, making them popular among investors. In 2022, companies within the S&P 500 stock market index disbursed an impressive $564.6 billion in dividends, an increase from the previous year's $511.2 billion.
However, companies might decide to withhold or cut dividends to conserve cash. In a research paper published in "Finance Research Letters" in October 2021, it was found that nearly 1,400 US companies cut or stopped dividends in the second quarter of 2020, largely due to the uncertainty spurred by the COVID-19 pandemic.
If a company you invested in stops or reduces dividend payments, it could be a trigger for you to sell your stock and shift to one that continues to yield dividends.
Day traders constantly buy and sell stocks throughout the trading day, aiming to profit from small intraday price movements. This trading strategy might offer high returns, but it comes with enormous risk. The US Securities and Exchange Commission (SEC) advises that day trading requires comprehensive market and news monitoring and involves substantial speculation.
The reality is that in a matter of minutes or hours, you could lose a significant portion or even all of your invested capital due to the fast-paced nature of day trading.
In conclusion, while selling stocks can seem challenging and unpredictable, understanding the potential triggers and reasons can make it more manageable. Remember, though, that each investor's situation is unique. Your decision to sell should align with your overall investment strategy and financial goals.