Know When To Hold'Em And When To Fold'Em: The Art Of Selling Stocks And Bonds

The "buy and hold" strategy has always been viewed as a good rule of thumb for investing. However, there are many occasions when selling some of your investments is beneficial. While there are countless books and resources advising investors on how to buy stocks and bonds and tips on which ones to buy, there are very few resources about selling your investments. Following are some of the top reasons to consider selling your investments and some tips on how and why to do so.

1. Sell if you wouldn't buy it now - Perhaps when you purchased the investment it was a bargain, and now the price is too high. Perhaps the investment is consistently losing money, or the company is falling behind industry changes. If you wouldn't buy it today, you probably shouldn't own it at all. Tip: Before you sell, ask yourself some practical questions, such as: Is the company becoming more profitable each year? Are the company's products in demand? Is the company keeping up with industry changes? If the answer to any of these questions is "no," then you should consider selling.

2. Sell to rebalance your portfolio - If an investment makes up more than 20% of your portfolio, it doesn't matter how great it is because you are incurring an extreme amount of risk. A safer bet is to limit individual investments to about 5% of your portfolio. If a particular stock or bond increases to more than 5%, sell to balance your portfolio and decrease your risk. Tip: Rebalance your portfolio at least once a year to make sure over-weighted investments are not putting your portfolio at a high risk.

3. Sell if you need the money - Perhaps you have invested in a 529 plan for your child's college education, and the time is fast approaching for him or her to leave the nest. Perhaps you began an aggressive mutual fund for your retirement when you were in your 40s, and now you are in your 60s. Know when it is time to move investments into safer and more liquid accounts so you can access them without incurring penalties. Tip: Calculate approximately how much you will need for different financial goals, such as your retirement or your child's education, well in advance and know which investments will be the best in helping you reach these goals.

4. Sell to lock in profits - Perhaps one of your stocks has recently performed like gangbusters. Rather then "buying and holding," sell off some of these profits and invest in something more conservative. This will help ensure that you are well-diversified for the long-term and will help protect your financial gains. Tip: When you buy a new stock, put in place three stop-loss sales. Each stop-loss will protect a percentage of your gains. If your investment reaches the stop-loss price, the sale is automatically triggered, locking in your profits.

5. Sell if there is a better place to put your money - If you have kept an under-performing stock or one that has had only mediocre performance, you might want to consider buying a better-performing investment. Tip: Before you ditch your average- performing stock or bond, do your homework and thoroughly research any new investment to make sure it is truly better than your current one.

Now that you know some of the reasons why selling your investments can be a good idea, here are three steps to help you find a way to actually let them go:

1. Take emotion out - Many investors have a loyalty to a particular investment. Perhaps they have been invested in this company for a long time, or they are company stocks that an employee is keeping out of company pride. Whatever the reason, the decision to sell your investments should be based on fundamentals and sound financial planning, not your emotions.

2. Have an exit strategy - Before purchasing any investment, you should always have an exit strategy. For example, decide how high or low your investment can go before you would consider selling. Keep in mind a realistic market price that is based on market fundamentals and research. If your investment reaches this predetermined high or low, then sell.

3. Seek help - It is never a good idea to rush into buying or selling your investments. A qualified financial advisor can help you create a comprehensive financial plan that includes recommendations on the best time to buy and sell your investments and a course of action for reaching your long-term financial goals.