When Should Our Club Sell a Stock?

A. Knowing when to buy or sell the stocks in your portfolio is often a difficult decision, whether it's your club or personal portfolio. Here are some guidelines that might help you out.

In no particular order, you should sell a stock when:

  • you need the cash (perhaps for college tuition for your kids, or to buy a home, or to pay off a debt)
  • you have found a better potential investment
  • you need to rebalance your portfolio, either by size of company or industry
  • the stock is vastly overvalued -- its current P/E ratio is much higher than its historical average P/E ratio
  • there is an adverse management change, such as the departure of a dynamic CEO or founder of the company
  • the company is facing declining profit margins, perhaps from increased competition, in three to five consecutive quarters
  • in order to take a tax loss to offset capital gains that you have incurred.

Here are some reasons not to sell:

  • because the price of the stock hasn't moved (you should re-examine the company's fundamentals, not focus on short-term price movement)
  • in order to realize a paper profit (many investors always sell their best performers and leave their dogs in their portfolio, which is like tending your garden by cutting the flowers and letting the weeds grow)
  • because of a paper loss (the market always comes back, so make sure it's the company and not the market you're selling. Also, your next investment has to perform even better just to overcome the losses, so it might be better to just hold on.)
  • because of temporary bad news -- take the time to re-evaluate the stock's long-term potential

Remember, every time you buy a stock, someone else is selling (and vice versa).