Questions to Ask Before You Sell a Stock

Markets have been up and down in recent days, but mostly down, which means a lot of people have selling on the mind. But before you run for the exits, you should ask yourself a question.

Jason Stipp 02 February, 2016 | 15:16
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Markets have been up and down in recent days, but mostly down, which means a lot of people have selling on the mind. But before you run for the exits, you should ask yourself --

Would I have sold this a month ago?
In December, the market was performing a little better. The value of this question is that it helps you sort out whether you are inclined to sell because you don't like the losses that you've had recently, or are you inclined to sell for some more fundamental reason?

If you have an investment that you've been worried about for some time--maybe it's an individual equity that, even after the recent market volatility, still looks overvalued to you or is too large a position in your portfolio. Those are good, fundamentally based reasons to sell that are distinct from the recent downturn.

If you're a fund investor primarily and you've got holdings that were taking up too large a share of your portfolio, or maybe you've determined that they are simply too risky for you -- I think those are perfectly good fundamentally-oriented reasons to sell, even though the market is trending down.

Another question you might ask is, have my long-term plans changed, which might mean I should make some changes in my portfolio? For example, if you are getting close to retirement and the asset allocation framework that you are using has changed, and it calls for having a greater allocation to bonds and perhaps even cash to queue up money for living expenses. In that case, even though it's not usually a great idea to be selling equities during a downdraft, it is perfectly defensible to consider getting your portfolio in line with your target allocation. 

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Jason Stipp  Jason Stipp is Site Editor for Morningstar.com

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