The decision of when to sell a stock, according to Bloomberg columnist Barry Ritholtz, is “perhaps the most overlooked and underappreciated problem in finance.”
Ritholtz provides a list of questions for an investor to ponder when attempting to make what can be a difficult and complex decision. These include:
- What is the basis for the selling? In most cases, Ritholtz argues, clients cite news headlines or emotional reasons behind their desire to sell. “Experience teaches us,” he asserts, “that most of the news is old and is already reflected in stock prices and is not a credible reason to sell.”
- What if you’re wrong? Although many are loath to admit a mistake, Ritholtz advises investors to “always have a line in the sand—where you recognize and admit your error, then reverse your trade decision.”
- What if you’re right? This, he says, is a more challenging question because it forces an investor to consider when and how to re-enter the market. “The permutations are many,” he says, and “the chances for getting it right but still failing are significant.”
- Do you have discipline? As important as it is for investors to have a plan to deal with various possible outcomes, Ritholtz says the bigger challenge is to adopt a disciplined approach and stick with it.
- What is the cost-benefit analysis? Tax considerations, says Ritholtz, should not be overlooked.