Many investors have short-term memories when it comes to both failure and success. The S&P 500 returned more than 26% in 2023 and more than 24% in 2024. Even 2025 is off to a strong start, gaining nearly 2% in the first month. When the broad market is performing so well, it can be difficult to justify selling stocks.
However, a market disruptor can quickly change that sentiment. Last week, it was DeepSeek, China’s latest entry into the artificial intelligence market, that rattled investors—suddenly, selling was top of mind.
So, what justifies selling an investment? It certainly shouldn’t be driven by emotion. This is where having a financial adviser can help, as they provide an objective perspective, helping you avoid panic selling.
A solid reason to sell is when a stock’s fundamentals no longer align with the original investment thesis. For example, if you invested in a company because it was an innovator in its sector, but since new competition has driven down margins, your original rationale may no longer hold. It doesn’t necessarily mean you must sell immediately, but you might consider trimming the position in favor of an investment with stronger prospects.
Rebalancing your portfolio is another reason to sell. Over the past few years, Large-Cap Growth stocks have significantly outperformed other asset classes. If your financial plan calls for a 20% allocation to Large-Cap Growth, that allocation has likely grown to 30% or even 40% of your portfolio. Trimming your winners to realign with your target allocation can help manage risk. Additionally, you may be selling at high prices and reallocating into undervalued opportunities.
Tax considerations can also drive selling decisions. If you have capital losses carried forward from previous years, you may choose to sell appreciated investments to offset gains. Importantly, you’re not required to exit the position entirely, nor are you restricted from reinvesting in the same stock to reset your cost basis.
Investors should also recognize how difficult it is to anticipate every market-moving event. If a company in your portfolio reports earnings and reveals that its largest customer is reducing orders, institutional investors and traders react instantly, and the stock price reflects that news almost immediately. However, by the time the average investor hears the news and sees a 20% decline, the damage is already done. Selling in a panic only locks in those losses. Instead, take the time to reassess whether the stock still aligns with your investment criteria. Depending on your strategy, a downturn might even present a buying opportunity.
For those managing their own investments without an adviser, it’s essential to define clear criteria for selling. This could include reaching a specific allocation percentage, hitting a predetermined price target, or failing to meet fundamental metrics like financial strength or market capitalization. Having these predefined guidelines can help you stay disciplined when emotions—fear or greed—tempt you to act impulsively.
If you have questions on how to define your sell criteria, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the February 1, 2025 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
