There are MANY questions in the world of investing that don’t necessarily have a “right or wrong” answer.
Also, as with personal finance, investing is VERY personal.
The answer to many questions will depend on each individual current circumstance as well as their financial goals and objectives.
There are a few questions in particular that I get quite frequently that even people with decades of experience have a difficult time answering.
And here they go:
Question #1: “I bought a stock and made a nice profit. How do you know when is a good time to sell?”
This is a question that I personally find quite challenging. I love the process of finding amazing companies, doing my research, verifying they are in fact amazing (or not!), and then adding them to my portfolio (if warranted).
If the investment turns out to be successful, I also love seeing the stock price appreciate as time goes by.
When we make investment decisions that turn out to be notably profitable, the decision to sell can become that much more difficult. Selling our profitable investments also means we are giving up on additional gains if the stock continues to go up in price.
But here’s the thing: It is impossible to predict what a stock will do before, during, or after we purchase it. If we knew that information, we would all be billionaires.
When faced with the dilemma of whether or not to sell a “winning” stock, consider the following:
Your original investing thesis: Think about the reasons why you bought the stock in the first place. Have those reasons changed? If they haven’t, why do you want to sell?
Next steps: Do you have specific plans for the money you’ll get once you sell the stock? Do you have a better alternative for that money?
Do you feel the need to “rebalance” your portfolio? Maybe your investment has grown to the point where you have too much money in one particular stock and you want to balance things out. This is a perfectly valid reason.
How long have you owned it? Remember that when you sell stock at a profit, you will owe taxes on it. People who own a stock for longer than 1 year are subject to “long term capital gains tax” which can vary from 0% to about 15% depending on the person’s tax bracket. People that hold their stock for a year or less, are subject to short term capital gains tax which is typically 20% or higher depending on the tax bracket.
Consider the above before you take next steps. The list is by no means comprehensive. However, it can help you reach a decision you can feel good about when it comes to selling your stock or leaving it alone.
Question #2: “When is the right time to buy a stock?”
In an ideal world, we would all know the “perfect” price in which to buy a stock and the “perfect” time to sell in order to collect our hefty profits.
Well, it doesn’t quite work that way.
It is VERY difficult to time the market or to know with 100% certainty the “perfect” time or perfect price in which to purchase anything.
The decision to buy a stock should be based on your research and whether or not you believe it is an investment that can actually make you money over time.
If you believe a company is solid and that it will be around for many years to come, the current price of the stock shouldn’t make or break your decision to buy the investment.
Here’s an example: Back in 2016, Amazon was selling for about $800 per share. Many believed the stock was “too expensive” and no longer worth buying at such a high price. Fast forward April of 2020, the stock is selling at well over $2,200 per share.
There are many examples similar to that one in the world of investing.
Buy a stock because you like the company and you can see it thriving for many years to come. Don’t base your decision on whether or not to buy simply on price.
Question #3: “Should I buy more of a stock I already own even though the price has gone up by a lot?”
This strategy is called “adding to winners”.
Ok so this might be a “good problem” to have but it does happen! As time goes by and you realize you’ve made some pretty awesome investing decisions with certain stocks or funds – you might be faced with the very real dilemma of whether or not to add to those “winning” positions.
When an investment has appreciated significantly you’ll find yourself very hesitant to buy at the “much higher” price. You are well aware of how much “cheaper” you got that investment in the first place. It is a tough position to be in.
While listening to a favorite podcast a couple of years ago, I heard these words of wisdom which really shifted my perspective on the idea of adding to winners:
David is one of the founders of The Motley Fool and someone I like to call one of my virtual “investing mentors”. He has always preached adding to winners but the idea finally clicked for me when I heard those words.
I decided to try out this strategy by taking baby steps with the companies in my portfolio that have not only done amazing but which I ALSO strongly believe will be around for many more years to come.
The verdict so far is that adding to winning positions has been one of my best investing decisions so far.
When making this decision for yourself some questions I’d encourage you to explore are the following:
(1) Your original investing thesis: Think about the reasons why you bought the stock in the first place. Is it still the same or perhaps even better than before? Maybe the business has improved even more since you first bought the stock.
(2) Staying Power: Do you still see this company around and thriving for the next 10, 15+ years?
If the answer to these questions is “yes” you might be onto something.
And that’s all folks! Any dilemmas you personally deal with or that you’d like me to talk about? Let me know below or email me Hello@Girlsonthemoney.com.
Cheers to HEALTH & Profits!
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