When to Sell

Knowing when to sell a stock or mutual fund is just as important to your financial health as knowing which ones to buy. Without selling the investments that no longer work for you, you run the risk of mounting losses, or, at the very least, of not making as much money as you could.

Here are 6 reasons to sell.

1. Conditions Have Changed

Hard questions to ask:

• Have the company's earnings prospects slowed down?
• Has management changed?
• Has the company gone through a merger that makes it less appealing?
• Has the firm's leadership position in the industry slipped?
• Is the industry itself in trouble?
• Are the fundamental reasons for buying the stock still in play?
• Is your fund still a leader in its category?
• Have assets ballooned since you bought the fund?
• Are you holding on to the investment for reasons of loyalty or nostalgia, or because you don't want to admit you've made a mistake?

Information sources: morningstar.com, valueline.com.

2. The Price Has Met Expectations

You may be tempted to sell if you've already made a lot of money on a particular stock or fund. Why risk losing a part of that spectacular gain? But what really matters is whether the company's future prospects will fuel additional gains. If sales and earnings have begun to slow down and competition is getting fiercer, the stock price may not have much further to go. Check the price to earnings ratio (P/E) on investment Web sites, in the newspaper stock listings or by consulting a financial planner.

3. You're Overloaded

A heavy investment in any one stock, fund or industry leaves you vulnerable to sharp losses if the company or sector begins to falter. For examples, look no further than the recent dot-com bust.

Experts suggest you limit the amount you have in any one stock to less than 5%, especially if the stock is that of your own employer because so much of your financial security is already tied to your job. No matter how devoted you are to the firm and how optimistic you are about its future, planners advise that you don't over invest.

4. Losses are Mounting

Don't sell simply because the price has dropped, especially if the decline is in keeping with the rest of the market. Though it may feel like the comfortable thing to do at the time, it usually ends up as the most painful when you witness the recovery in investments you've just sold.

On the other hand, if your shares have been losing more money than similar stocks and funds for six months to a year or more—or aren't making as much as comparable investments when prices are rising—it's probably time to re-evaluate. If the losses are making you lose sleep at night, get out. No investment is worth that anxiety.

5. It's Time to Rebalance

Your mix will shift over time because prices in the market constantly change. Some of your investments will fare better than others and start to take up a bigger percentage of your portfolio, throwing you off. So rebalance your portfolio once a year.

A financial planner, such as one from Navy Federal Investment & Insurance Services, can provide guidance.

6. You Need the Money Soon

Any money you'll need within the next three years doesn't belong in stocks. Stocks are ideally suited for goals at least 10 years away.

So if you have any stocks you've earmarked for an occasion just a few years away, sell your shares and shift the proceeds into a safer, more liquid account, such as a short-term bond or money market fund.