Why You Should (and Shouldn't) Sell Your Winning Stocks

Summary

Have you ever sold a stock only to regret it when it continued to climb? This is a common investor dilemma, and understanding when and how to sell is crucial. The general advice is to be reluctant to sell a winning stock, especially if the original reasons for buying it still hold true. If a company's earnings or sales have increased, its value has likely increased proportionally, meaning it's still as good a buy as when you first invested. The primary reason to consider selling a winner is position sizing: if a single stock grows to represent too large a portion of your portfolio, say over thirty or fifty percent, it can be wise to 'top slice,' selling a small portion, perhaps a quarter, to rebalance and free up cash for other investments. This also prevents you from being left with only underperforming stocks if you sold all your winners. The main reason to sell a stock is when its prospects have significantly diminished. This is more common with losing stocks. When you examine your losing investments, look for permanent reasons why they are underperforming, not just hope for a quick recovery. If you find a solid, irreversible reason for the decline, it's often best to sell the entire position. This strategy of partially selling winners and fully selling losers generates cash for new investment opportunities. While it might seem counterintuitive, sometimes a stock's price drops due to external factors unrelated to the company's performance, like a major shareholder's death or a one-off natural disaster. In such cases, buying more of the stock could be a good strategy, as the underlying business is likely to recover. However, if a company's decline is due to fundamental issues like a failed product or superior competition, selling is the sensible action.