Selling stocks is a difficult choice, the decision must be made on a rational basis and keeping the emotion in check, especially in difficult market phases: investors often panic and sell shares when the market goes down, and lose money, but there are some situations in which selling stocks may be right.
There is a precise reason why selling the shares you have in your portfolio is more difficult than buying them. In fact, on average, investors are much more hesitant to liquidate a position than to open one. Usually the temptation to sell becomes stronger when there is a market downturn. On the contrary, when things are going well, greed prevails over fear, so investors keep stocks to take advantage of the trend of prices to grow.
When things go wrong, investors with deranged and badly constructed portfolios panic (which is why it can be helpful to understand how to structure an investment portfolio). In short, they have to face an eventuality not considered. So, finding themselves in front of losses, they rush to sell, consolidating an often important economic damage. There are four cases in which the sale of shares makes a rational sense and is favorable to the investor.
Sell stocks when the goal has been achieved
You invest for a reason. One of these, for example, could be the creation of capital for a well-defined future purpose. When, thanks to the performance of the markets, the objective is achieved, it will be necessary to liquidate all the shares and bonds and to remain “liquid”.
I mean that if a person wants to reach a capital of 100,000 to buy a house, when he reaches the sum he would have to demobilize everything. Continuing to invest would mean exposing yourself to unnecessary risks. Since the goal has already been reached, the danger consists in a sudden drop that temporarily burns part of the sum, so the most rational choice is to freeze and stand still. Even if the market continues to rise.
Sell your shares if life needs have changed
An investment portfolio is built on the basis of certain assumptions that affect people’s private lives. If these change, for any reason, it makes sense to remodel the composition of the portfolio itself.
As an example, a person who changes jobs, moving from an “employee” to an “independent” position, may decide to move to a more prudent approach to avoid an aggravation of the overall family risk.
Sell stocks to balance the investment portfolio
Those who follow a contrarian approach will have to sell shares on the occasion of periodic portfolio rebalancing. This is a particularly effective form of optimization, as it allows you to buy low and sell high. Ultimately the exact opposite of what unwitting investors do.
When to sell stocks if you invest with a short time horizon
Anyone with a time horizon of less than 4 years should not invest in stocks. Those who, on the contrary, have a multi-year perspective will do well to increase the share of shares they have in their portfolio.
Over time, however, it is appropriate to review the investment choices made. In this way, the equity percentage will have to drop as the investment maturity approaches.