Investing 101: How to Make a Selling Strategy
It's no fun to lose money, but I'm sure everyone has had this happen to them in some form of way. Perhaps you bought a new shirt only to realize that it looked hideous in a certain light and unfortunately it cost you a lot of money. Maybe you bought too much produce and a good portion of it went bad and you had to throw it away before you can consume it. Likewise, people make poor investing decisions which causes them to sell stocks.
Instead of chalking losing money in the stock market as a mistake that will make you never want to invest again, perhaps you should take a look at the other mistakes that led you to lose money: say "oh well" and change your approach. A bad fashion choice doesn't mean you stop wearing clothes (dear God, I hope so), if your food goes bad that doesn't mean you stop feeding yourself, so therefore a losing stock should not mean that you give up on the stock market altogether, it just means you need to make a plan so that you won't make the same mistake again.
But how? There are a few important things to remember when selling stocks in the future, and here are the best things to keep in mind:
1) There Is No "One-Size-Fits-All" Selling Strategy - Sorry to keep bringing up the clothing analogy, but this is an important point to keep in mind. Just because one selling strategy worked for your family or friends does not mean it will work for you too. If Uncle Pete only sells a stock after it drops 20% and completely ignores the fundamentals, this could be dangerous if you don't consider other factors about the stock. It takes some time to know how to buy and sell stocks effectively, but it helps to go in understanding what kind of investor you are: some may like risk, some may not. Some may only want long-term holdings, some want to take advantage of pops in particular stocks. You get it - understand your investing strategy first then you can understand your selling strategy. If you'd like, you can even take this quiz that I posted on GradMoney earlier this year on learning about your individual risk tolerance.
2) Ask Yourself: Why Did You Buy the Stock in the First Place? - This is very important to remember. Let's say, you own shares of Facebook (FB) and the stock is collapsing at the moment. Why did you buy the stock? Did your co-worker tell you to buy the stock because it is a "sure thing"? Did you hear someone say good things about the stock on TV? Or did you buy it because you're an active user of the site, you see the trend of how many of your friends and family currently use the site and how it keeps growing? Whatever the reason, it helps to remember what brought you to own the stock in the first place. Take all advice and all research (solo or otherwise) with a grain of salt and know that you should question that source in the future.
3) What Changed with the Stock that Made You Change Your Mind? - If you're considering selling a stock like Facebook just because it dropped 10%, this is not a good enough reason. A 10%-decline is the "What?" but you need to know the "Why?". Are shares declining because earnings were bad this quarter and the stock is reacting to news? Are shares declining because a famous new commentator said they no longer like the stock? Is the company going out of business and filed for bankruptcy? What is the situation at hand here? Depending on the severity, it may serve as a good reason to sell the stock, but this is not always the case. The majority of the time, the selling-excuses I get are bogus and the drop is due to a short-term flux and a year later the stock has more than doubled in value. Ask yourself the hard questions and learn what is making you pull the plug on the stock before you get too trigger-happy.
4) Does the Aforementioned Change Impact Your Reason For Investing in the Stock the First Place? - If you bought shares of Facebook because you like the company and expect it to keep growing due all the new services being offered, does a 10% decline from negative comments by a news personality change that reason for you investing in the first place? Of course not! You're in it for the long-term based on far different reasons than the reason for the stock's decline. But if you bought the stock only based on earnings expectations and now those have changed, consider selling the stock. There ought to be a cause and effect relationship here. If the change in the stock changes your thesis, then it may be time to cut ties.