Sign #1 You don’t understand the stock
Before investing in an asset it’s important to understand exactly what you are buying. This can take some thorough research and time, but it’s definitely worth it. If you’ve purchased a stock that you no longer understand or never did to begin with, you may want to consider selling or at the very least hitting the books to read up on it.
— CanstarInvestorHub (@InvestorHubAUS) January 4, 2019
Sign #2 Fundamentals start to fail
The fundamentals of a company include its revenue, earnings, future growth, return on equity, profit margins, and other data that determine a company’s underlying value and potential for future growth. Understanding the fundamentals can help investors determine a company’s financial health. However, keep in mind that things can change, whether it’s the economic environment affecting the company or internal changes. If the fundamentals no longer add up and the financial ratios are beginning to paint a different picture of a company, it could be time to sell.
Sign #3 Changes in the stock cause your portfolio to become unbalanced
Deciding on the right balance of assets, generally a mix of growth and defensive assets, is an important step for first-time investors and rebalancing to maintain your ideal asset allocation is equally important in the long run. This ensures that you are not only diversified but also that your asset allocation represents the level of risk you are comfortable with as an investor. And, often part of the rebalancing process is to sell or buy more stocks.
For example, consider a portfolio with two investments that are split evenly, 50% stocks and 50% bonds. Let’s say that stocks have performed very strongly and now significantly outweigh the bonds in this portfolio. To get back to the original asset allocation some stocks will need to be sold.
Related articles: The 4-Step Investment Health Check
Sign #4 A company has cut or eliminated dividends
Public companies are not required to pay dividends, and can cut or eliminate them altogether if they choose to. Dividends are particularly important for income investors. So, if you are investing for the purpose of having an additional income stream, and one of your holdings decides to no longer pay dividends, you may want to consider selling up and investing your money elsewhere.
Related articles: 3 Ways To Approach Income Investing
Sign #5 You’ve reached your investment goal
It might sound obvious to some, but when you’ve reached your investment goal it could be a good time to withdraw your funds. It can be easy to get carried away, particularly when your shares are performing particularly well. But, the danger here is that stocks, in particular, tend to be quite volatile and as quickly as they can grow, they can also fall just as fast.
Sign #6 Your investments are keeping you up at night
Finally, if you’ve made an investment that just isn’t sitting right with you and is anxiety inducing, you’re likely better off selling that asset. It could be that you’ve invested into a stock that is especially volatile or perhaps the market overall is on the decline. Either way, if you’re losing sleep over an investment it could be time to sell.
BONUS TIP – Sell-down strategy
The opposite of dollar-cost-averaging, a sell-down strategy often involves selling part of your stock holdings, often a fixed amount, in incremental periods. So, instead of selling all your shares at once, you could part with them slowly and make the most of the fluctuating price changes. This can be an effective way of managing risk and you could end up with more in your pocket.
Cover image: SFIO CRACHO (Shutterstock)