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If you think buying stocks is difficult, wait until you have to decide whether to sell. If you sell too soon, you may lose out on immense future gains; sell too late and your gains may evaporate.
When is the right time to sell a stock? There are no easy answers, but here are some tips from the pros:
- Sell at a gain. “When a stock’s price is so high that it makes no sense-sell,” says Kathleen Stepp, a CPA and financial planner in Overland Park, Kansas. “Don’t be greedy and don’t use taxes as an excuse for not taking gains. A lot of people in this area work for Sprint, which has issued a PCS tracking stock for its digital phones. The price has gone up so much that it’s illogical, so I’m advising [my] clients to sell.” Stepp also notes that you don’t need to sell all of your shares once the price shoots up. “You can sell part of a position,” she says, “to get your money out, and still maintain exposure to a stock.”
Russell Ewing, portfolio manager with Paradigm Asset Management in New York City, advises setting an expected after-tax return when you purchase shares. “For some stocks it might be 20%, for [others] it might be 100%,” he says. “Once the stock reaches that point, sell. Maintaining discipline will pay off over the long term.”
- Sell at a loss. Many investors have more difficulty with selling losers than winners, contends Beth Gamel, a CPA and financial planner in Lexington, Massachusetts. “Their ego gets in the way,” she says. “People get emotional about their investments and take it as a personal failure if they sell a stock at a loss. In truth, everybody buys losers-even professional money managers.”
Like Ewing’s advice on gains, Alan Weiss, a financial planner in Woodbridge, Connecticut, recommends setting a “mental stop-loss” before investing. “You might say to yourself, I’m willing to take a 20% loss on this stock, but I’m reluctant to lose more. Then, if you buy a stock at $50 and it goes down to $40, it’s time to take another look and decide whether the reasons for buying the stock are still valid.”
- Taxing matters. The most tax-efficient strategy, says Weiss, is to sell your losers and let your winners run. “When you sell stocks at a loss, you can use those losses to offset capital gains for the year,” he says. Excess losses up to $3,000 can be deducted to offset your ordinary income.
If you decide to take profits, pay attention to the calendar, Gamel advises. “Rather than sell after 11 months, wait until you’ve held the stock for more than 12 months. At that point, your profits will be long-term capital gains and you’ll pay federal income tax at a rate no higher than 20%, vs. as much as 39.6% on short-term gains.”
If your holdings are up, you may get the sell signal you need during the normal course of a company’s events. “People spend a lot of time researching