If 2020 has taught us one thing, it’s that you can’t always predict what’s about to happen or how you’ll react. Whether it is a national stock market crash or a worldwide pandemic, people act similarly.
Panic and fear take the best of us. Remember how almost everyone overstocked on toilet paper back in March 2020? Well, that’s how many people will react to a market crash. They run without thinking and do the worst possible thing instead of looking at the bigger picture.
While toilet paper supplies will get used up eventually, selling a stock might be a mistake beyond repair.
Even the safest investments can underperform or crash. And sometimes you achieve your goal and can’t be bothered with investments anymore.
It’s best to sell your stock if you need money for an emergency, your investment is trapping your money without bringing any significant revenue, or you’ve reached your financial goal. Aside from that, it might be best to not take out any profits, as to not miss out on future potential gains as well as the compounding effect of money growth.
How Long To Leave Your Money In The Stock Market
Experts advise that the minimum time you need to leave your money in the stock market is 8 weeks. On the other hand, a stock reaches a breakout price in 12 to 18 months. So what’s the optimal time to keep stocks?
A bull market is a market on the rise in a stable economy, and it tends to last 2 to 4 years. Selling your stocks depends on when in the given period you began investing. The most significant profits are usually made in the first half.
When your stock has broken out, as a rule of thumb, you should take the profit when the stock reaches 20% to 25% past a good buy point. If the stock jumps 20% in a short time after the breakout point, you should keep it longer.
Analyze the stock’s chart, and if it holds up well, you want to wait for another breakout point that might send the stock even higher.
Situations When You Should Sell Your Stocks
In specific cases, it’s better or much needed to sell your stocks for profit. These are not the typical everyday situations, but if you find yourself doubting, here’s when it’s okay to cash out your stocks.
You Need Money Urgently
Your emergency fund can come short to cover an urgent problem that came up. This could be large medical bills, job loss, natural disasters, etc.
While resorting to selling shares should not be your first option, an unpostponable emergency is a valid reason. Make sure to first check out all other options available, like selling any unnecessary valuables, liquidating other investments, or use your credit card.
Stocks Are Underperforming For a Longer Period
The main idea behind investing is to put your money to work. So when your money is not earning you anything, or you’re losing it, selling might be a good idea. You should sell the underperforming stock and look for better investment options.
But first, take a glance at how stocks from the same industry are performing. The problem might not be in your stock, but the whole industry branch might be declining.
It’s best to get familiar with the products of the company you own stocks in. Then you can evaluate by yourself if the stock is underperforming because competitors took over or because the whole industry is no longer profitable.
You’ve Reached Your Financial Goal
Not everyone that buys shares is an avid investor, and I get that. If you purchased stock to help you reach a specific financial goal, it’s understandable you’d want to sell them when you meet the goal.
Let’s say you don’t want to commit to ultra-long term investments but want to save up for a specific goal in 8 years. Savings accounts have minimal interest, so saving in an investment account is a better idea. Once you reach the goal, sell the stock and enjoy the money!
Stock Money is Enough to Live Off in Your Retirement
It’s not rare to have your money for retirement invested in stocks. You buy different stocks throughout your life and diversify your portfolio so when you retire; you can sell it and live off the money.
Some people resort to high-risk, high-return investments before retirement to make up for the money they failed to save. If these investments work out, you need to sell and enjoy the extra money in retirement.
The Cost Of Holding Cash vs. Stock
You might feel safer with cash on hand, but holding on to money can come with a high opportunity cost. Money is a powerful tool to have on hand – you can buy assets when their prices go down.
Cash has low volatility, but it’s affected by inflation and deflation. Your $1,000 will still be $1,000 after 10 years, but you won’t be able to buy as much with them. In the last 10 years, the USA’s inflation rate is 19%, meaning $1,000 is worth $1,193.4 today. Today, $1,000 can buy only 83.79% of what they could in 2010.
When it comes to stocks, inflation can affect your equities’ return, but you can always readjust your portfolio and buy more growth-oriented stock.
What’s The Wash-Sale Rule?
When you sell stock at a loss, you can enjoy tax benefits. But to do so, you can’t buy the same or substantially identical investment 30 days before or after the sale. This is called the wash-sale rule, and it prohibits tax benefits misuse.
If you decide to go with a wash-sale, your yearly taxes will be higher since the IRS won’t allow you to write off the investment loss.
Don’t Dread A Market Crash
Market crashes are usual, and many factors contribute to them. As we all know, the latest hit was thanks to the worldwide pandemic.
You, as an investor, can’t sacrifice your sleep dreading the next market crash. Or worse, cashing out all your stocks to be safe.
Instead, prepare well for the next crash.
Diversify Your Investments
Create a portfolio that can withstand the storm. Don’t carry all your eggs in one basket. Diversify your investments across different places, so when the next crash hits, you won’t deal with tremendous losses.
Two great examples; keep 40% in bonds and 60% in stocks, or 40% in domestic stock, 25% in foreign, 15% in small companies, and 15% in real estate investment trusts.
Calculate Your Risk Tolerance
High-risk investments sound tempting, having in mind their high-return, but can your anxiety take it? Can you sustain your emotions and wait it out in an eventual fall, or are you the type that yells “SELL!” anytime their stock goes significantly down?
It’s essential to understand how stock markets work, the crashes in the past, and the risk you can tolerate.
Make Use Of Market Dips
Instead of fearing a market crash, expect it. Even better, prepare some extra cash to invest in an eventual market dip.
Do you have any stock you would like to own? Set some cash aside and enter when everyone is leaving. In some cases, these snap up investments can make you a fortune.
When Stock Prices Drop Where Does The Money Go
Stock prices are formed based on supply and demand. Simply put, Apple stocks went up and still go up because there’s an ongoing demand for iPhones, iPads, iWatches, MacBooks, etc.
When a stock goes down in value, the investor loses their money; they don’t go to someone else. It means the company is not making as much profit and decreases in value. You get a “paper loss,” and the money disappears into thin air.
Benefits of Owning Stocks Long-Term
Keeping your stock for an extended period allows you to reinvest your gains or dividends and generate a more significant profit in the long run.
Long term investments carry a smaller emotional burden; you’re not obsessed with checking up on your stocks every day or get stressed if they fall by 10% this month. Stocks can fall to $0 but can rise indefinitely.
Long-term investing is straightforward; you don’t need anyone’s help to pick the top successful companies running for 20 or 50 years and buy their stocks.
Holding your stocks longer than a year brings you tax benefits; long-term capital gain taxes range from 20% to 0% depending on your income. Short-term gain taxes are significantly higher, starting at 10% and up to 39.6%.
Deciding on when to sell your stocks depends on various factors, but your comfort is number one. If you keep on stressing over your risky investment or you urgently need funds to cover necessary expenses, you need to ditch the stocks and keep yourself and your finances in place.
Many life situations hit us unprepared, like sudden moving, divorcing, and ending up unemployed. Money’s sole purpose is to give you a comfortable and secure life.
It doesn’t hurt to ask for a second opinion and advice when thinking about selling your stocks. Try to benefit from the long-term investments but have your comfort in mind at all times.