Stock Selling Mistakes
An important part of any investment strategy is developing a methodology for ultimately selling your investments. Unfortunately, many investors sell based on emotional factors, making one of several mistakes:
• Holding on to an investment with a loss. Psychologically, it's difficult for investors to sell an investment with a loss. Many prefer to wait until the investment at least gets back to a break-even level. However, that may never happen or may take a long time to do so. Take a hard look at the investment and consider selling if you can reinvest in an investment with better prospects.
• Hanging on to capture more gain. When an investment has increased dramatically, you may be reluctant to sell, even if you feel its price has gone too high too fast. There's always the risk you'll sell and the price will keep going up. But sometimes it's best to protect your gains and sell while you're ahead.
• Not setting price targets. One way to take the emotion out of selling is to set high and low price targets for reevaluating an investment. You don't have to sell when the investment reaches those targets, but at least review whether you should sell. Sticking with rigid rules for selling when an investment declines by a certain percentage can help ensure you sell before incurring substantial losses.
• Trying to time the market. It's difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell stocks based on those daily fluctuations is difficult.
• Worrying too much about taxes. Taxes can consume a significant portion of your investment gains. Even if you have long-term capital gains, 15% of your gains will go to the federal government in capital gains taxes (taxpayers in the 10% or 15% tax bracket pay 0% in 2010). However, avoiding taxes may not be a good reason to hold on to an investment. There are typically strategies that can be used to help offset the tax burden, but there's not much you can do about a loss in investment value. If it's time to sell an investment, you should probably do so, even if you have to pay taxes on your gains.
• Not paying attention to your investments. Your portfolio needs to be evaluated on a periodic basis, or you could miss signals that it may be time to sell. You should reevaluate an investment when the company changes management, when the company is acquired or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock.