In a few clicks of a button, an investor might become the proud owner of new stock. Researching new stocks can be a hard-but-rewarding endeavor. And once a stock gets purchased, the real market ride begins.
In an ideal world, every stock lifts off like a rocket ship, earning a sky-high return. But that’s not how the stock market always works out for investors. Some stocks may grow in value. Others might lose money. And the value of some can stay about the same. Simply put, it’s hard to predict how markets will act.
As tricky as it is to know when to buy a stock, knowing how long to hold a stock may be even thornier. Knowing when to buy, when to hold, and when to sell isn’t made any easier by a stock’s current value — whether its value is up, down or relatively flat.
“How long should you hold stocks?” is a question that vexes many investors. Frankly, there’s no universal answer to this common query. (Fluctuating factors, after all, can shift a stock’s valuation.)
Still, when wrestling with this question, there are some strategies investors could think through. Here’s an overview of things that can impact an investor’s choice to hold on to a stock.
To Sell or Not to Sell?
The question of “how long should you hold stocks?” is also about the appropriate time to sell. A reality check is a good place to begin: There’s no universal protocol for stock-selling that will guarantee market gains.
Certainty is just not how the stock market works. Depending on an investor’s goals, different answers and approaches may make more sense.
One way to think about the markets is: If there were some simple formula that everyone could follow to make money with stocks, then anyone could become a successful investor. But, naturally, no such formula exists. It’s why there’s no shortage of cable news shows or online forums dedicated to when to sell stocks.
Here are some factors for investors considering either holding or selling.
Why Hold on to Stocks Long Term?
Reacting Right Now Isn’t an Investing Strategy
Here might be a good reason for an investor to hold on to a stock: They only feel compelled to sell it because of that stock’s most recent performance in the markets.
Selling a stock because of a sudden drop in value could be considered timing the market — a strategy that, at times, can hurt investors. Daily or periodic fluctuations in stocks’ value may convince investors to sell when their stocks could be at a loss due to an otherwise short-term dip in the market. What happens today in the markets doesn’t necessarily reflect tomorrow or longer trends.
A study done by Dalbar illustrates how investors who attempt to time the market often turn into their own worst enemies. During the 20-year period studied, the S&P 500 had an average annual return of approximately 10%. During the same time period, the average investor achieved a return of just 2.5%, due to the frequent changing of their investment holdings (often mutual funds).
Sure, in the moment, it can be tempting to sell a stock based on a dramatic price change. But considering price alone may not be particularly helpful. Stocks that enjoy long-term growth take on some dips in price. Similarly, dud stocks may have some brief moments in the sun.
Buying and Holding for the Long Game
What’s the ideal holding period for a stock? Some investors might say forever. (Or, at least until the money is needed — like for retirement income.)
There are several allures to holding stocks for a long time. First, spending ample time in the market reduces the risk of short-term volatility. Ups and downs in value are an inevitable part of investing in the stock market, whether through a single stock or a fund. Especially in the short-term, the market could move in any direction.
The bear market between 2007 and 2009 is a prime example of this, as the U.S. stock market lost more than 50% of its value then. This wasn’t an ideal time to be holding stocks, but it was an even worse time to sell. With a buy-and-hold strategy, investors can keep their eyes fixed on the brighter days ahead. The stock market has never experienced a dip that it did not bounce back from.
Over the course of market cycles, returns rebound and investors can hope to return something that lands closer to a longer-term average. That average has been about 10% annualized over history, although investors may want to lower their expectations, just to be on the conservative side.
However the future unfolds, it’ll bring with it the highs and the lows typical of the stock market. Buy-and-hold investors understand this rollercoaster ride. Many tend to believe that highs and lows cannot even be predicted, as stock prices can shift based on predictive hunches that don’t follow one rational rhythm or foreseeable formula.
The market performance of stocks in any year is a crapshoot. But for buy-and-hold investors, a single bad year in the stock market doesn’t necessarily mean that the companies whose stocks they’ve chosen are inherently bad investments. It’s possible that the cyclical nature of markets is causing a short-term dip in value for an otherwise sound company.
Buy-and-hold is a strategy that is popular with index fund investors. Index funds hold a representative sample of the entire stock market in an attempt to achieve the market’s average returns. Instead of betting on just one company stock’s performance, index funds invest in the entire engine of the economy. It’s a bet that in decades, companies will have created additional wealth in the world.
Holding Stocks for Future Profitability
Let’s say that a company’s stock has performed well. Perhaps it’s even hit an investor’s profitability target. Is growth alone a good reason to sell? Some investors might think no.
At any moment in time, what makes an investment worth holding on to is the belief that it will be profitable in the future. Therefore, what has happened in the recent past may or may not be relevant to the future.
In investing parlance, this notion is called fundamental analysis. Here are just a few big factors that an investor might chew on when adopting this type of market analysis:
An investor wants to hold on to the stock of a company that continues to increase its sales over time, with a forward-looking forecast that indicates growth. Perhaps the company continues to beat Wall Street’s expectations on earnings.
Maybe the company has strong management that continues to improve profit margins without sacrificing innovation. Or perhaps the company continues to develop products that increasingly capture market share, making the company a stronger industry competitor.
While none of the above scenarios outright guarantee a company’s stock will continue to perform well into the future, keeping an eye trained on the days ahead instead of the past may be a useful skill for investors to develop.
Reasons to Sell Stocks
Selling Once a Stock Hits a Profit Requirement
Some investors and traders, however, are not interested in long-term holding strategies. Instead, they set certain profit thresholds, selling once those requirements are met. Here’s one scenario in this camp:
A trader may want to sell once a stock reaches 10% or 20% in profit. Similarly, a stock could be sold once it hits a preselected price target, usually based on a stock’s per-share price. Price-target selling can be set up automatically through what’s called a limit order.
For example, an investor buys a stock for $50. They want to sell this stock if (and only if) the price reaches $65. A limit order can be set to sell when the stock hits this target price. If it never reaches $65, then the order is not filled (and the stock remains held).
Selling for Personal Reasons
Although it is not generally recommended that an investment strategy change in response to the market’s ups and downs, there are plenty of personal reasons why a person may opt to sell stock investments.
Certain life events may create a shift in an investor’s ability to tolerate the risk of stocks. For instance, a divorce, family death, the birth of a child or a big move may cause a person to want to keep more of their overall investment portfolio in easy-to-access cash (or other less volatile investments).
Similarly, a person might just want to build up their cash savings. For financial goals with a more immediate timeline, it may make little sense to subject that money to the volatility of the stock market. Instead, savers may prefer to sell stocks to keep that money liquid and ready to be used.
Changes in personal investment strategy can also drive an individual to sell stocks. Shifts along these lines may have nothing to do with a stock’s recent performance or that of the market. Investors approaching retirement, for example, could want to shift towards more conservative investments, like cash or bond holdings.
Selling to Diversify Assets
Many investors opt to put a mix of stocks, bonds, and cash in their long-term investment portfolios. For example, an investor may choose a mix of 70% stocks and 30% bonds to balance out investment goals and risk tolerance.
But when diversifying assets, one type of investment may outperform the other. Because of the potential for this uneven growth, an investor’s asset allocation could get thrown out of balance.
Let’s imagine a large spurt of growth in the stock market coupled with more lackluster growth in the bond market. Remember the investor from above, with a 70/30 mix? Maybe now they’re left with a portfolio that’s closer to 80% stocks and 20% bonds.
That mix may carry more risk than the investor deems appropriate. So, in this scenario, rebalancing the portfolio requires selling some stock holdings and then moving the funds into less volatile bonds.
Understanding Short-Term Holdings
Investors debating how long to hold their stocks will likely want to consider taxes. There’s no minimum amount of time when an investor needs to hold on to stock.
But investments that are sold at a gain are taxed at a capital gains tax rate. This rate changes depending on whether the investor held onto the stock for more or less than one year.
For a holding period of less than one year, any gains will be taxed at a person’s marginal income tax rate. By holding onto a stock for more than one year, an investor will likely lower their tax burden. It can be helpful for investors to speak with a certified tax professional before adopting any tax strategy.
Build Your Investment Strategy
Armed with information on when to hold stocks (and when to sell), market-curious investors might then choose to select their investment strategy.
One simple way to buy and sell stocks is through an online investment account. In brokerage accounts, self-directed investors can pick stocks and other investments (such as, ETFs) that they’d like to actively invest in.
Another option is to use a portfolio-building tool that takes into account an investor’s individual financial goals, preferred timeline and risk tolerance.
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