When To Sell A Stock

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It's very difficult to know when to sell a stock. Very little research has been done on the subject, and advice from brokers is usually vague and confusing. Typical comments:

  • "Let's watch it one more day."
  • "Can't tell it now, but you should get out on the next rally."
  • "It's not doing well right now, but it's sure to come back over the long haul."

If the stock you've bought has gone up, the two conflicting cliche's on Wall Street are:

  • "Can't get hurt taking a profit."
  • "Let your profits run."

What to do instead: When it comes to evaluating an individual stock, you should look for one thing--failure. This sounds austere, but what to look for is very specific. A stock that tries to rally fails to make a new high.

How to determine failure: The stock must sell below the price level at which it had held in a previous "correction" (decline). If you were to look at this sequence visually on a stock chart, you would see a series of lower highs and lower lows. That type of action establishes failure. It defines the stock's trend as down, not up.

Sell! Put aside all hope that the stock will stabilize or rally wildly or that it will come back if you hold it long enough. The market is telling you, in no uncertain terms, that something is wrong. You don't have to know what or why. That information frequently doesn't come out until the stock has tumbled a very long distance down. You've made an objective decision. Stick with it.

When to decide to sell: When the stock market is closed. That way, each little gyration won't emotionally affect your decision.

After you've made an objective decision, use a protective stop order. How it works: Tell your broker to sell the stock automatically when it drops below a certain point.

You can use stop orders effectively even if the stock rises. Each time the price advances, cancel the old stop order and enter a new one. One arbitrary rule: Set the stop order price at 10% below the current market price.

Excerpt from: Bottom Line Year Book 1997, based on Laurence L. Foster and Thomas J. Hakala, partners in the personal financial planning practice of KPMG Peat Marwick LLP.

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