How Do You Know When to Sell a Stock?
When to Sell a Stock and How to Choose the Right Financial Planner to Help You Decide
In a recent Q&A, I was asked: “When do you know it’s time to sell a stock, and how can a financial planner help you decide?” These are great questions, and here are my thoughts:
When to Sell A Stock
There are several scenarios when you know it’s time to sell a stock.
- When your investment thesis or reason why you bought the stock, fails to materialize. This failure can occur when the company fails to execute on an expected strategy or changes its overall strategy entirely. Your investment thesis may also fail to materialize because the fundamental landscape, competitive situation, or economic environment has deteriorated. When this occurs, it is highly likely that you should sell the stock and use your cash to invest elsewhere.
- If a better investment opportunity comes along, and you need the cash to invest.
- Overvaluation. When your stock position becomes exceedingly overvalued, you should consider selling, especially if you need to replenish your cash cushion.
Picking the Right Financial Planner
A financial planner is a type of financial advisor who helps organize your finances and prepares you to reach your long-term financial goals. In deciding when to sell a stock, that planner should also have investment management expertise, as well as a fiduciary obligation to you, the client. It is that requirement for a fiduciary obligation that separates a registered investment advisor from a broker-dealer. Sometimes, when financial planners don’t have the investment management expertise, they will outsource that capability to a third-party money manager. Importantly, your financial professional should be able to formulate a compelling investment thesis and understand when that thesis is deteriorating.
Key Features in Choosing the Right Financial Planner
Here are key features to consider when vetting a financial planner or advisor to manage your investment portfolio. He or she should:
- Have a deep insight into the relative merits and disadvantages of different investment opportunities.
- Have the skills to determine which opportunities to act upon, given the current economic environment and your financial situation.
- Know market factors that could impact the investment thesis and act quickly and prudently when such factors come into play.
- Have a good sense of the intrinsic value of a stock, or other security, and be able to determine when it becomes overvalued. The average person typically doesn’t have securities analysis skills to assess intrinsic value.
- Establish an appropriate cash cushion for your current situation and use his or her investment expertise to determine when to sell stock or other investments to replenish that cash.
For all these reasons, having a financial planner/investment advisor with investment management skills is a valuable resource for creating an investment portfolio, monitoring that portfolio, and knowing when to buy and sell investment securities. Until next time.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of QMI Capital Management LLC unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.