20 Typical Reasons To Sell Your Stock Or Mutual Fund

by Silicon Valley Blogger on 2012-06-069

Don’t get scared out of the market. Learn to spot the reasons why you should sell your equities, and do so with a level head or with sufficient planning and true intention.

That Scary Market!

Before deciding to sell a stock or mutual fund, we must understand our motivations. Too many times, I’ve seen buying manias bubble up among my friends, only to be followed by major “freak out” fests when they decide to bail out of the market all at once. And unfortunately, shared emotions like these can be very contagious.

Yes, the market can be pretty intimidating! Throughout my own investing experience, I’ve been through trigger happy episodes where I’ve made lots of moves a lot of the time, while on other occasions felt paralyzed and unable to make any move at all. That’s because releasing your money into an uncertain environment can be nerve-wracking, especially if you happen to be a virgin investor.

Who hasn’t felt the need for financial crutches: from money professionals to tips picked up from random places such as a message board, by the water cooler, a financial television show, or a bunch of investing newsletters and periodicals, or heavens forbid, a blog? I’ve seen very intelligent people rendered befuddled by a market governed by social, economic and psychological forces such that they aren’t able to trust their own financial or investing decisions. From this, I’m not immune either.

Despite this, we’re still supposed to make investments. We learn to buy into the market while we’re young and are prodded to start a financial plan. Sometime later, we sell our stocks or mutual funds when we’ve reached our goals and need the money.

Don’t feel married to a stock or mutual fund. One of these days, you’ll just have to dump it. And it could happen more often than you think. I’ll go over the many reasons investors sell their positions, and I’ll tackle this from three different perspectives. I’ll cover why and when to sell general equity positions as well as when to unload individual stocks and mutual funds. There are varied reasons that may influence your desire to sell.

When To Sell Equities (In General)

Stock Market

The overall market is starting to look toppy.
Well that’s kind of obvious. If you have a strong feeling about this, you can decide to hold on through the froth or take your profits and run. But are you really willing to time the market? That’s a good question since to do this properly, you’ll need to analyze market indicators to make a reasonable prediction about future market behavior.

You need to rebalance your position.
This may be a little debatable and there’s a right and wrong way to do this. If you don’t have the extra cash to rebalance your asset allocation by doing purchases into underrepresented asset classes, then you may have to consider selling your overweighted holdings in order to balance your allocation out. When you’re selling a position for strategic reasons, check whether you’re going to incur a gain or a loss. If you will incur a gain, hit your retirement accounts for the sale in order to avoid tax consequences. If you’re facing a loss, touch your regular accounts so that you can take a loss for the tax year.

You’re sweating and can’t sleep at night.
Have you reached your maximum comfort zone? Unlike in real life, when you’re supposed to “stretch” yourself and go beyond your comfort zone in order to “grow” as a person, you don’t need to prove yourself when you’re dealing with the stock market. If you’re feeling queasy and you’re tossing and turning at night, then get out of the market. It’s for your own health and well-being. Look at this as a lesson about knowing yourself well enough so you can invest prudently and avoid bad trades in the future.

You need the money.
Ok so you’re in over your head and you have bills to pay, no emergency fund and your savings are in the market. It’s time for a priority check! It’s also probably time to bail out of the market and divert the money where it belongs.

Your values and principles are no longer in line with your holdings.
If you’re sensing that your stock or fund is beginning to disagree with your inner philosophies, morals and value system, then you’ll probably want to reconsider what you’re holding. You probably don’t want to own something that is being questioned at the legal level either or cited for ethics violations. But that’s up to you, since everyone’s views on this are different.

There’s a better place for your money.
With so many competing opportunities out there, you may find the need to revisit why you’re holding a given stock or mutual fund. I’d caution you to be careful about moving your money around too often though; after sheer volatility, transaction or redemption fees, and the tax man get their cut, you may not be left with much else.

You meet your goals and it’s time to fulfill them.
This is one time when you may want to seriously consider shifting your portfolio and unloading your shares. In fact, it is probably one of the best reasons to sell — in order to actually ENJOY your money and use it for what it was intended for.

You need a tax break.
Part of your tax strategy may be to sell losses to offset capital gains you may have incurred.

You have stock options that you need to redeem.
If you’re holding on company stock options, at some point you may need to redeem them. Perhaps you’ve left your company and there’s that customary 3 month window for exercising your shares and you just don’t have the money to put up to buy the options outright, in which case you’re forced to sell. Or you just need to diversify out of a heavily concentrated company position.

When Do You Dump An Individual Stock?

Now that we’ve discussed the general picture, let’s discuss some specifics. What are some reasons for selling individual stocks?

The company behind the stock is hurting.
It’s natural to want to sell out of a stock when the company behind it is having difficulties. You’ll need to gauge if you’d rather not wait for the company to come out of the doldrums and if you’d prefer to find an alternative place for your money. Successful investors have done the opposite and bought into stock of hurting companies though, to apply the contrarian approach.

The stock is overvalued.
If the P/E Ratio or other value meters for a stock have changed significantly in a short period of time, it’s time to get out of the stock, I would think. This sounds easy, except if the stock you have is perenially expensive and overvalued, then it’s movements are probably more governed by trading momentum and it may be harder to figure out when to get out. You’ll need to know your stock pretty well, especially when it’s historically been a high P/E stock.

You’ve satisfied your trading parameters.
Trading stocks? Whether your stock’s price has hit your target ceiling or floor, stick to your guns and sell.

The stock’s fundamentals have changed.
A company can start to slow down after many years of solid growth. The company may begin to mature and may no longer command its earlier valuation, so the stock dips and you may want to move on. Unfortunately, this is part of a company’s life cycle and doesn’t mean there’s anything wrong with the company itself.

Now for more long term investments, I hold mutual funds. Stock mutual funds should be at the core of your portfolio, so if you’re going to sell a fund, you’ll be dealing with a different set of reasons for selling.

When Do You Sell A Mutual Fund?

Mutual funds have their unique considerations which you’ll want to take note of as well.

A fund that consistently underperforms its benchmark shouldn’t be in your roster.
Make sure you’re looking at a fund’s relative performance and not its absolute performance. The fund’s performance should be gauged against other funds in its same category and not against other sectors, styles or even the total market. Follow your asset allocation plan and avoid chasing performance based solely on a fund’s one year performance.

There’s a change in the fund’s manager.
I have had the managers of my funds change many times through the years. However, I haven’t necessarily sold off my fund positions yet since this could incur a large tax event. I keep my eye on the funds though, to see if performance holds up.

There’s a change in strategy or orientation.
Any such change in fund style will mess up my asset allocation. I’d look for an alternative fund if this happens.

The fund has grown too big.
A large fund becomes unwieldy and harder to manage. Often, performance suffers. So watch out for this. It’s good that many fund families realize this ahead of time and close their funds to new investors; it’s when they don’t that you should particularly worry and maybe take action.

The fund’s expense ratio rises or the fund undergoes changes with its fee structure.
Why bother with a more expensive fund? There are many no-loads out there that perform well for less and with greater efficiency.

You need to consolidate redundant accounts.
When I was new to the mutual fund game, I couldn’t help but open one mutual fund account after another. I couldn’t make up my mind what funds to hold because there were just so many superior ones out there. But in time, I had to cut back and my life is much simpler with fewer of them to track.

The fund family is undergoing a bad rap (or some other kind of scandal).
I remember a while back when one of my fund families got entangled in some financial scandals involving misrepresentation and potential consumer fraud. Some fund managers were cited and I got pretty nervous. Ultimately, I had to dump it.

When To Buy Equities

Generally, it may be easier to know when to get into the market. Buy in when you understand what your investor risk profile and financial goals are, and if you are capable of withstanding risk and know what you are buying. The best time to start investing is when you’re young and have the discretionary income that comes to you free of any strings, of dependents, oppressing obligations or deep debt. After you’ve covered all your financial priorities, see what you’ve got left over. If you have something (any amount) to spare and you feel ready, then start reading up on finance and investing, learn all that you can about putting your money to work and start stocking up on stocks and mutual funds.

The conventional wisdom is for you to keep that money working hard so that one day you’ll taste the fruits of its labor. But you’ll need to know why you may have to do some selling as well. As I’ve mentioned earlier, I’ve been a victim of my own impulses when it came time to unload equities, so I’m keen on improving my track record here.

In general, the more mechanical you can be about your stock transactions, the better off you will be. The moment you have emotion entering into the picture, the more likely you will actually make mistakes, make the wrong move and get upset about it. Unfortunately for me, I am somewhat of an emotional investor, where I’ve found myself visibly reacting to market movements a little too much. I’ve vowed to work on these weaknesses though, by being more systematic about investing rather than being reactive. If I’ve avoided the emotion from the beginning of my investing life, I’d probably have a net worth many times more than what I have today.

Created February 15, 2007. Updated June 6, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 9 comments… read them below or add one }

Sun February 15, 2007 at 10:53 am

This a very good piece that covers almost every reason I can think of to sell my shares. Recently I am considering getting rid of one large-cap mutual fund among two that shifted the investment style from small-/mid-cap to large-cap. In determining which one to sell, I also looked at fund turnover ratios and distributions. Since the funds are in taxable accounts, higher turnover means higher distribution, therefore taxes. This is another factor to consider on top of performance, ER, etc.

Silicon Valley Blogger February 15, 2007 at 12:33 pm

Hi Sun
Thanks for the additional points. You’re quite right! Actually it’s often easy to ignore fund turnover and distributions. I even doubt most people notice that in their portfolios.

My Wealth Journey February 16, 2007 at 3:40 pm

Great post. One reason that I learned as a tough reason to sell a stock is thinking I can play the market by buying low and selling high and trying to repeat. You end up missing on a lot of upside because you keep thinking it’ll go back down. This does depend on the stock. I got burned by doing this with AKAM. Sold at 20 from a 12 basis. I bought back in at 30 and sold at 35 and now its at 55+. 🙁

Silicon Valley Blogger February 16, 2007 at 9:40 pm

My Wealth Journey,
In order for me to minimize my frustration with the market, I have my core portfolio in ETFs which act like stocks but then I never have to think about having to ever sell for a while…. 🙂 I just ride out the volatility then. But I know what you mean about individual stocks; it’s all in hindsight though.

Melanie Olsen April 2, 2007 at 2:55 pm

I need money to pay bills. How do I sell stocks without a broker. I’ve had these stocks since I was a child. I don’t know if I have all the certificates. I do keep nall my dividend receipts.

Please advise ASAP. Thanks so much

Silicon Valley Blogger April 2, 2007 at 5:06 pm

You can probably work out transferring your stocks to an online brokerage — you can call the contact info for Charles Schwab, Vanguard, E*Trade, etc. You can perhaps get some advice from their representatives as to how you can transfer your stocks over. Once you are able to do this, you will be able to sell your stocks online and without a broker. Each institution may have different policies so it’s best if you call a few of them and ask for their assistance on how to proceed and what your transaction fees are going to be.

Good luck!

Joey June 6, 2012 at 5:30 pm

I wouldn’t own an individual stock outright unless I know the stock well and will hold only a smidgen of it for a relatively shorter term. Stocks are good to add punch to a portfolio and for me, are primarily just short term investments or trades. That’s not to say that there aren’t amazingly gifted stock pickers who will do this for a living or apply this as a core investment approach, but most investors who aren’t experts in this area should think twice before they decide to touch individual stocks.

bILL June 10, 2012 at 11:31 am

I sold a small % of FDIVX–dIV int’l fund. IT IS -10 FOR THE 2012 YEAR.

Good move? Bad move?

Funny about Money June 10, 2012 at 7:42 pm

Sometimes it takes rock-steady nerves to stay the course. According to the latest statements, my investments lost more last month than I need to live on for an entire year.

So far I haven’t had to draw down from those retirement funds to survive. But unless business gets real good real fast, by December my survival savings (the money I’m living off after having been canned) will be gone., When times are good, this doesn’t seem so scary. But when the equivalent of an entire year’s worth of living money disappears into the air…holy mackerel!

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