When to sell
Three good reasons and a few bad ones — and why the decision should be made before the price moves.
Three good reasons
First: your thesis broke. You bought a company because you expected something; that thing is not happening and is not going to. The price plays no part in that judgement.
Second: you need the money. That is what investing is for. Selling to buy a home or pay for an education is not failure, it is the plan being completed.
Third: the position has grown out of control. If a holding has gone from 5% to 30% of your portfolio, you now have a concentration you never chose.
Bad reasons that sound good
"It has gone up a lot, I am taking my profit." The price you paid has nothing to do with today's value. The market does not know what you paid, and it does not care.
"It has fallen a lot, I will wait for it to come back and then sell." That ties the decision to an arbitrary number — your purchase price — instead of today's value.
"Everyone is selling." That is the reason that triggers selling right at the bottom of a fall, where the damage is greatest.
Decide in advance
Rules written down before you open a position are far better than judgement in a moment of stress.
A simple rebalancing rule — return to your target weights once a year, or whenever something drifts more than ten percentage points — makes most of these decisions for you.
That is the real reason rebalancing works: not because it times the market, but because it takes out of your hands the decision you are most likely to get wrong.
Key terms in this lesson
- Sunk cost
- Money already spent, which should not influence any future decision.
- Anchoring
- Tying a decision to an arbitrary number, usually the price you paid.
- Investment thesis
- The written reason you bought something — and therefore the only way to know when to sell it.
Quick check
A stock has fallen 30% and you decide to wait "until it gets back to my price" before selling. What is the mistake?
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