Although hearing a story about the big fish that got away is fun, it’s never enjoyable to watch profits disappear when your stock drops below the price you purchased it. Knowing when to pull money from the stock market is part science and part art. Although no investor has ever had an iron-clad method of successfully pulling money from the market, there are signs in the markets and individual stocks for which successful investors watch to help time when to press the “sell” button.
Place stop orders on your individual stocks and exchange traded funds. Stop orders allow you to avoid a market collapse by placing an automatic sell order that triggers when prices plummet to a point you’ve previously specified. Although stocks may rebound in the future, stop orders help you avoid losing your savings during a market collapse. Because mutual funds only trade at the end of the day, they aren’t eligible for stop orders.
Track your individual investments. If your stock has a management change, major recall of products, or a government investigation, it may be time to sell your stock. Investor Warren Buffet spends all of his time researching and maintaining stocks that have good fundamentals such as rising profits, low overhead and consistent earnings. If a company loses those fundamentals, it’s a good time to pull your cash out.
Follow the markets. Some investors have mistakenly sold investments when the entire market gyrates, thinking that the individual investments in their portfolio have sunk. Investors who panic when the market sinks lose money. Stocks are best held for the long term, so first examine if the problem is your investment or the market. If the market has lost 5 percent and your index fund has only lost 2 percent, your fund is holding up admirably and the management is doing a good job.
Write out your goals. If your goals are closer than five years away, it’s time to begin selling your stocks. You may want to begin selling earlier if your stocks are risky, because international and small company stocks are more volatile than large U.S. company stocks. Rather than sell on a single day, spread your sales over a few days to avoid selling everything on a low day in the market.
Read financial data as it's released. It may be a good time to sell when consumer spending or corporate earnings seem to be slowing across the board. Similarly, when the Consumer Price Index raises several quarters in a row, this could be a sign of a slowing economy and a struggling stock market. Watch out also for ecstatic investors. When your neighbor tells you about the next hot technology investment that already made him a ton of money, chances are good that the technology sector of the market is overheating and may be due for a tumble. Remember the old mantra to buy low and sell high.