If you’ve set aside money for savings and investment, you’ve taken the first huge step towards achieving your financial goals. After all, most Americans couldn’t pay for a $1,000 emergency expense, and only 15% of American families own stock directly (although this number jumps to 53% when retirement plans are included). The point is, beginning to save and invest is a huge hurdle, so you’re to be congratulated if you’ve made it this far.
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The next big question is this: when is it time to buy, sell or hold stocks? That is a much more complicated question that even investors with years of experience struggle with. However, there are some basic guidelines you should consider as to when to buy, sell or hold. As each investor’s financial situation is different, however, be sure to discuss any moves you make with your financial advisor.
When To Buy Stocks
For the best chance at success, consider establishing an investment plan with your advisor before diving into stocks. Your investment plan should outline what the long-term objectives of your portfolio are, along with your desired entry points into specific stocks. One way to use this method is to set a price range where you’ll be interested in buying a particular stock. Another would be to use valuation as a trigger, meaning you’ll buy a stock when it reaches a certain price-earnings ratio (P/E) or other valuation level.
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If you’re a long-term investor, the best time to buy a stock is always “now.” If you’re regularly buying into the market weekly or monthly, valuation isn’t as much of a concern. By dollar-cost averaging into the market, you’ll be getting a long-term average price, assuring that you’re never consistently buying at the peak of the market.
When To Sell Stocks
Investors are emotional beings, and oftentimes emotions can cloud judgment. A common characteristic among investors is to sell stocks at a profit too early, and to hang on to losing stocks for too long. To overcome these innate tendencies, it helps to have a sell discipline in place for every stock you buy.
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For some investors, valuation is a key indicator as to when to sell a stock. For example, if a company runs up to the very top of its average P/E ratio range, some will use that as a sign that it’s time to sell the stock. Traders tend to sell stocks when they reach certain price targets or specific points on a chart. Longer-term investors may only sell stocks to rebalance their portfolios. For example, if you have 20 stocks, each with a 5% weighting, you might consider selling a portion of a position if it reaches, say, 10% of your portfolio.
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No matter how you decide to sell your stocks, it pays to have a written investment strategy in place so that emotions don’t override your long-term plan.
When To Hold Stocks
Wall Street is nothing if not the source of countless pithy investment axioms. One of the more popular ones is that, “If you’re holding, you’re a buyer.” What this means is that making the decision to hold on to a stock is the exact same decision as if you were to buy it today at current market prices. So, if you want to hold a stock, you should decide if you’d be willing to buy the stock at current prices. If the answer is “no, it’s too high,” then you should consider selling. Of course, as mentioned above, you should consider your entire portfolio, tax consequences and other ramifications of your sale before you pull the trigger.
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Last updated: May 26, 2021