Selling stocks is challenging, as it often involves making important decisions while having incomplete information. Besides, no one can make a 100% accurate prediction, and this fact can be extremely intimidating. Emotions may also be overwhelming and disruptive to sound judgment.

FX Guru is happy to share some valuable tips on when to sell stocks based on years of experience.
We also included advice from fellow professional investors, so read ahead for profound insights.

When Is the Right Moment to Sell Stocks?

Generally speaking, the more frequently investors buy and sell stocks, the more they lose. While a lot of reasons for stock prices to be depressed are visible in hindsight, it is risky to give them too much weight – remember not to confuse momentary market events with those relevant to your long-term investment goals.
Thus, it is often best to withhold from initiating corrective actions right after something doesn’t go the way you planned. In the long run, stress resistance and patience are the key factors that will help you make wise trading decisions.

So when to sell stocks? According to one of the greatest American investors, Philip Arthur Fisher, if you did well when buying a common stock, the time to sell it is almost never. Yet, in the dynamic world we live in, no one is safe from making investment mistakes.

Common Investor Traps in Selling Stocks

Investing in stocks typically triggers all kinds of emotions, from anger and disappointment to satisfaction and excitement. While market volatility may be unpleasant, we can’t stop the fluctuation of stock prices. What we can do, however, is choose rationality over emotions when trading.

Nowadays, there are so many convincing pundits talking about the economy, markets, stock prices, and interest rates that it is easy to get confused and fall under the wrong influence.

Indeed, such overabundance of information in combination with market fluctuations may result in rash acts if a stock owner is not careful enough. Therefore, it is essential to give every decision a second thought before taking action.

Another trap that many investors fall into is overconfidence. Many traders forget how crucial it is to know how to admit mistakes and move on to better ideas.

Top-3 Rules for Beneficial Stock Sales

It is essential for investors to have a flexible approach and always rely on common sense. Below you will find three main rules that will help you make wiser decisions when selling stocks.

Rule #1: Sell If a Company’s Long-Term Earning Power Is Permanently Weakened
The first and foremost reason to sell a stock is when the investor believes that a company is no longer able to generate profit in the long term. Had this decision been easy, we would identify and get rid of value traps and rather invest in stocks with great potential and a low price. However, in reality, it is one of the most complex and influential predictions to make.

So the best tactic here is to define the factors that are currently holding the company back. Try to analyze whether the moment of weakness of its stocks is temporary or it is here to stay. For instance, issues like sluggish growth or currency headwinds have high chances to be resolved within a year or two. On the other hand, new strong competition or a drastic change of customer preferences have the power to impair a company’s profitability forever.

Therefore, it is extremely useful to assess the negative and positive factors affecting the company and put them either into a permanent or transitory category. This way, you will be one step closer to deciding whether to keep or sell the stocks.

Rule #2: Sell When the Stock’s Valuation Is at an Excessive Level
If a company’s fundamentals are developing as you hoped, there is usually no need to sell its stocks. Nevertheless, the stock prices can diverge radically from their intrinsic value for a variety of reasons.

The S&P 500’s long-term price-to-earnings ratio is approximately 15x, but the market has a tendency for mean reversion. Typically, investors prefer not to pay over 20x the earnings of their holdings, so a P/E exceeding 30x would be a reason to reconsider stock ownership.

In short, stay aware of valuation risk. While there is always a possibility for an investor to own under- and overvalued stocks, a well-diversified portfolio often neutralizes company-specific valuation risk.

Rule #3: Sell If You Have a Better Investment Idea

The majority of investment portfolios feature at least several stocks that are lukewarm holdings. Even though patience is key, it is a good idea to always look out for unique opportunities for upgrading your stocks collection.

Here are some characteristics to pay attention to in a potential buy:
Higher yield
Superior business quality
Better long-term perspectives
Safer dividend

If a stock with such features comes your way at an attractive price, it is worth considering a swap with one of your not-so-valuable holdings.

Bottom Line: Efficient Stock Sales Require a Strategy

One of the biggest challenges investors face is selling stocks. In the swirl of emotions, you may not notice yourself chasing short-term profits instead of the long-term gains you are aiming for.

Here are some simple steps you can undertake to minimize the risks of falling into the common investor traps:
Avoid unnecessary trading
Think of buying and selling stocks only when being emotionally stable
Always analyze the factors that cause a stock’s underperformance and classify them as permanent or temporary

Lastly, it is critical that you keep your long-term investment goals in mind at all times and ensure that all your trading activities are committed to them. Wishing you exceptionally beneficial stock sales!