Quick question: What's the fastest way to make millions in the stock market? Easy -- buy a handful of high-quality stocks and ride them to riches.
Unfortunately, it's not always that simple. Although investors may think they have a lock on knowing what and when to buy, more often than not they forget the flip side of that equation -- knowing when to sell.
Parting is such sweet sorrow
Although investors may be able to hang on to some stocks for years or even decades, fundamentals do sometimes change, and the reasons for owning a stock in the first place may no longer apply. None of us likes to admit that we're holding on to a loser, but investors need to examine their situations dispassionately. There's a big psychological barrier in place when it comes to selling stocks, so if you can get around that wall and let go of investments at the appropriate times, you'll be light-years ahead of most.
For example, take the recent sell-off in financial stocks. Falling housing prices and troubles in the mortgage market slammed financials across the board. This has been an equal-opportunity sell-off that has punished stocks regardless of whether their underlying fundamentals have been affected.
Put simply, times like these call on investors to re-evaluate their holdings.
Of course, remember the baby and the bathwater
There are some financial stocks that have been beaten down but still maintain great long-term prospects, such as Wells Fargo, Bank of America, and BB&T. Despite the recent turmoil, the long-term bottom line is unlikely to be strongly affected at these companies, given their financial strength and operational diversification.
On the other hand, some companies have been inflicted with long-term damage from the credit market fallout. It's unlikely that Washington Mutual, which has significant mortgage exposure, will revisit recent highs anytime soon.
In cases like these, investors may need to give serious thought to selling. And although many will want to hold in hopes of regaining some of that lost ground, it can be worthwhile to cut your losses and redeploy that money elsewhere.
Bringing in the backup
Of course, if you don't have the stomach for constantly reassessing whether it's time to sell your stocks, there is another solution -- investing in mutual funds. Why not let an industry expert worry about making the sell decision? After all, he or she generally has access to information, resources, and personnel that individual investors do not.
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