How to know when to sell your stocks

Finding a compelling reason to get out of the stock market is easy. The hard part is judging how it will affect your financial stability – especially if you’re considering retirement.

The turmoil of a financial crisis should not be your main motivation to sell. Don’t just cash out and wait for the storm to pass, especially if your decision-making may be affected by panic.

Sell if it seems like a good opportunity to rebalance your portfolio. Being “all-in or nothing” is the investment equivalent of playing with fire.

One option is to keep things simple by establishing a clear allocation of assets that correlates with your current relationship to risk.

Ask yourself: “How much risk can I take right now? Do I want to take any? And do I need to?” This will help you stick to a solid plan rather than the whims of intuition.

Sell if it’s time to diversify. If you’ve kept most of your retirement assets in the stock market during the accumulation phase, you’ll still need cash or bonds for spending money eventually.

It’s hard to know when to rethink your diversification profile – the bottom of a bear market certainly isn’t ideal – but in the midst of a run-up is usually a sound opportunity.

Sell if it looks like you’re going to be wrong. This applies more to niche investments and concentrated stocks. A good investor will carry out a “pre-mortem” to make sure they spot red flags and know when to pull out.

Sell when you’ve come out on top, i.e. your return on investment would cover 20-25x your expected annual retirement expenses – after you’ve factored in lifestyle inflation. This will mean sacrificing potential future wins, but it’ll also avoid any frustrations from volatility.

Sell when your risk profile changes. Not all portfolio decisions are about considering market fundamentals. Your current situation – and what it needs to become – may be just as important.