When Should You Sell Stocks?

There are personal reasons to sell a stock. And there are investing-related reasons to sell a stock.

Most often, personal finance drives the decision to sell a stock because you need the money. You need to pay your child’s tuition. You need to pay the IRS. Your dog tore her ACL and she’s going to need a bionic knee (apparently). One reason we all invest is to have the money we need when we need it.

Whenever you sell, though, you’re giving up the long-term growth potential of your investment capital. There are times when you want or need to do that, but it’s important to keep that general principle in mind.

By contrast, sometimes you should sell a stock because you’ve made an investing mistake. Your initial analysis turns out to have been wrong, you’ve lost faith in management, or the company has done something else to change your mind about its future. For me, though, it’s the personal reasons that are more painful. Here’s why.

2022 is a bear market

This is a bad year to be selling stock. Ideally, you’d have a cash cushion to cover unexpected financial needs. That way, you wouldn’t have to sell stocks in a down market.

I take a different approach. I’m usually 100% invested in the market, because unfortunately for me, I don’t have a saver’s mentality. If I have cash, I want to spend it. When I was a kid my father once gave me $20 to put in my wallet for emergency situations. You know what I did with that $20? I spent it. “I really need this video game, it’s an emergency.” So to trick my brain, I “spend” money investing in stocks.

The problem with that approach is that when an actual financial emergency pops up, I don’t have that cash to cover it. Instead, I have to find a stock to sell, even though I hate doing it.

The advantage of this approach is that it has worked to instill patience in my investing most of the time. If I don’t need cash, then I just don’t sell. That’s helped me stick with a stock even when it goes through a bad period.

A case study: My dog Vanna just tore her ACL

Still, it can be painful when those emergencies happen. When my dog tore the canine equivalent of her ACL, I had to raise some cash. Which of my favorite stocks am I going to sell to raise some cash? This is going to hurt. But I love my dog more than my stocks. So I had to sell something.

The problem is that I hadn’t lost faith in anything about the companies whose shares I owned. Ironically, I ended up choosing Freshpet (NASDAQ: FRPT), which like many stocks has had a terrible year.

I know why Freshpet has seen its share price fall. Inflation is awful, and people are cutting costs and nobody wants to spend a lot of dollars on high-end meat for their dogs. The other day I was shopping in the grocery store. And some guy, out of the blue, started talking to me about how crazy it was that people are buying refrigerated food for their pets.

I didn’t mention that I do that (I try not to argue with strangers in grocery stores). But it occurred to me that a lot of people don’t like spending a lot of money on their dogs, especially in bad economic climates.

Sometimes I talk up my stocks with strangers. And dog people, we’re always running into other dog people. So I’d say, “Hey, have y’all tried Freshpet? My dog loves it.”

They would say, “Oh yeah, how much does that cost?”

I would say, “It costs a lot. It’s on the high end.”

They would say, “I really don’t want to spend that much.”

Forced to make a decision between Freshpet and the other high-conviction stocks I own, conversations like that would lodge in my brain. It is expensive dog food. Maybe it caters to a more high-end niche and a lot of people don’t want to spend the money. In the end, my Freshpet investment went toward saving my dog.

Have a cash cushion!

If I had a bunch of cash in a savings account, or even a checking account, I would still have my Freshpet shares. I’d be able to participate in what I hope is a big rebound, as I still think Freshpet could be a 10-bagger from here.

No hard feelings, though. I love my dog more than my Freshpet shares. And I’ll be back when I raise the cash.

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Taylor Carmichael has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Freshpet. The Motley Fool has a disclosure policy.

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