As investors scour the financial media, they come acrossideas that appear to be winning moves. It's hard enough to know which of the ideas hold merit, but even when you decide to pull the trigger and buy a or a , you're faced with another challenge:
When is the right time to sell?
I've come up with four guideposts thathelp you answer that question:
1. What Initially Drew You To The Company Has Changed Dramatically.
We all buy sales fail to develop? If those are the reasons that you bought the , then it's time to sell.or based on certain virtues. A company may have just hired a bright executive, launched a hot product or developed strategies to tap new international markets. But what happens when that new abruptly leaves? Or the hot new strategy is a dud in the place? Or international
This is known as "thesis drift." Investors tend to rationalize bad news and come up with fresh reasons to still like a already have lost the trust of most other investors, and you should remain dubious as well.: Indeed, companies tend to pair bad news with good news, glossing over the tough reality. "We stumbled badly with the last product, but think we have another great product to release to the in coming months," they'll say. Frankly, companies that raise investors' hopes and repeatedly dash them
2. The Company Is Now Worth Far More Than Its Peers.
Unless you intend to buy and hold an for a very long time, you need to have a clear sense of what an is worth. The easiest way to gauge an appropriate value is to compare the to its peers. If all of the companies in the same peer group have similar growth rates and have similar levels of profits, but your particular has risen in value and now has a price-to-earnings (P/E) or price-to-cash-flow valuation that is higher than the peers, then you've likely scored all of the gains that you see in the near-term.
The best investors tend to buy Warren Buffett do so every day.of high-quality companies when they are out of favor (or have fallen in price) and they tend to sell those same after they have produced great returns. That's where the phrase "good company, bad " comes from. It's hard to part with winning , but even great investors like
As a good rule of thumb, try to figure out what you think a The #1 Rule Every New and our article on how to Investor Needs to KnowFind Bargain . Like Buffett With These 4 Value Ratios) If a rises up above its perceived "fair value," it may be time to head for the exits.'s true worth should be. (You can learn how by reading
3. Your Stop-Loss Limits Are Rapidly Approaching.
On occasion, you'll notice that one of youris slowly losing value, though you are unsure why it's happening. There is likely a good reason for it. For example, some investors may have learned that a rival has launched a more impressive product. Or perhaps the is getting caught up in a broader downdraft that could quickly spiral into a full-fledged .
4. Your Gut Says TheHas Become Too Risky.
As an investor gets closer to retirement, a portfolio should take a more defensive posture. That means fewer high-growthand more income-producing and value-oriented . That makes the decision on which to sell a bit easier. If you own of a high-flying tech that has surged in value recently and you are within five years of retirement, it may be wise to sell off this winner and re-deploy the assets into a more boring, but safer, or .
TheAnswer: Selling and that have performed well is counter-intuitive. Investors like to "let their winners ride." Yet a decision to sell an that has performed poorly and has already lost a of value may also seem unwise. But you need to continually assess the relative value of each if your , whether the news has been good or bad.
As a silver lining, thesesales enable you to free up for the next time that bargains appear in the .
As a broader rule of thumb, followed by Warren Buffett and many others, the best time to selland is when the has moved steadily higher for an extended period. And the best time to up on is after the next pullback. Buying low and selling high is still the name of the game.
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