No investor has a perfect record, and therefore we all are eventually faced with the prospect of selling a stock for a loss. It’s human nature to be pained by this process – but it’s important to remember that selling a stock in the red can sometimes be the best possible thing for your portfolio.
When to sell a stock is never obvious. But a good sale price is just as important as a good buy price — and sometimes, the right time to sell for a particular investment will come even if the investment has lost you money.
Readers often ask me about big moving stocks like JCPenney (JCP), Tesla (TSLA) and Facebook (FB). Some folks who bought TSLA around $180 when it seemed like it could do no wrong are wondering if the stock can ever get back up to that level. Other folks are stuck with a bad stock like JCP and wondering if they can hope for a change of fortune to sell at a better price.
I was struck by the fact that most folks are weighing the merits of the stock based not on the news or the charts, but simply by the fact that they own it. That fact seems to trump all else.
But here’s a good rule of thumb if any of these trades are on your mind: If you didn’t already own the stock… would you buy it right now at the current price?
If not, sell.
A practical example: Let’s say you foolishly bought 1,000 shares of JCP at $20 for $20k in total. Now JCP is around $10 so you have 1,000 shares worth $10k. What if you take that cash and invest it in, say, LinkedIn (LNKD) – which doubles in stock price over the next 12 months. You obviously have your $20k back. Which one do you think is more likely – that JCP will hit $20 a share and make you whole, or that you can recoup your lost cash faster in a different investment?
More importantly, by moving your money around you can seek out opportunities that not just get you back to square faster — but actually build you profits.
Time is money. And the more time you waste in a bad stock, the less time you have to make money. Even if a losing investment slowly drifts higher, the only thing you have accomplished is feeling better about yourself.
Want to feel better about your portfolio? Move your money into a winner instead of limping across the finish line on your current nag.
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Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.