When to Sell a Stock: How to Know If You’re Holding On Too Long

When to Let Go: Traps to Avoid and Signs to Watch for in Stock Investing

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner and founder of Palmen Valley Wealth Management, discusses the critical decision of knowing when to let go of a stock. Hunter covers emotional and financial traps that keep investors holding losing stocks, including the sunk cost fallacy and emotional attachment. He also explores how to identify changes in a company’s fundamentals and the impact of taxes on investment decisions. Hunter shares strategies on how to make smarter stock selling decisions and highlights the importance of a disciplined, systematic approach to investing. The episode concludes with Hunter offering actionable insights and inviting listeners to share their best financial decisions.

00:00 Introduction to the Podcast
00:57 The Emotional Traps of Holding Stocks
02:53 Recognizing When to Sell: Emotional and Fundamental Indicators
11:05 The Impact of Taxes on Selling Decisions
17:48 Actionable Steps for Selling Stocks
27:27 Conclusion and Final Thoughts

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner and founder of Palmen Valley Wealth Management. In today's episode, we're diving into a topic that most investors will face sooner or later, and that is knowing when to let go of a stock. Most of us have been there if you've invested in single holdings. You may have once upon a time, bought a stock that was trading fairly low, right? Relative to its value or what you perceived as its value, right? Maybe you bought a stock at$8 a share. Now it's trading at two or$300 a share. So you bought it, it runs up, you feel great, you feel like a genius, and then the inevitable happens. It starts to slide. But instead of selling, you tell yourself it'll come back. I've held it for this long already. Months, sometimes years go by and that stock that you once bragged about is now dead weight in your portfolio. So what do you do? In today's episode, we're going to talk about the emotional and financial traps that keep people holding on to losers. Too long, we'll go over red flags and what to watch for, how to know when the company's story has changed. And how to make smarter decisions about selling without letting taxes and emotions hold you back. We'll talk about how this fits into the Palm Valley pathway. the process that I use to help clients make strategically and discipline moves that serve their goals, not their egos. By the end of this episode, you'll know exactly how to identify whether that stock that you've been hanging onto deserves a second chance or a clean exit. But before we jump in, I just wanna say thank you to everyone that replied, to my request last week. What was your best financial decision that you've ever made? there is a text link in the show notes, so if you want to continue to tell me those best decisions financially that you've ever made. Hey, I, I love reading these. That's awesome. one listener sticks out in mine. he or she received a hundred thousand dollars inheritance when they were about 21, 22 years old. and the best decision cliche, but they said they made, was hiring a financial advisor. So they. Ruin, that a hundred thousand dollars, which has turned into quite a nest egg for them as well. And then, this listener talked about all the other value, that financial advisor has given them, over the 20 years that they've been working together. there's value to be had with a financial advisor if you find a good one. So hang on to that. But again, I love reading those stories. so if you. Want to tell me your best financial decision that you've ever made, go ahead and click that text me button, in the show notes, and I would love to read that and potentially, talk about it on future episodes. So thank you, and if you're liking this episode, go ahead and leave a five star review on your favorite podcast and app, but let's jump in. How do we know that we've been holding on to a stock too long? Well, there's multiple components to think about. There's the emotional side of holding stocks, and then there's the fundamental side of holding stocks. and so you have to balance that, giving your situation what your goals are, what you're trying to achieve, what the stock is valued, or what you perceive the stock to be valued. all those things come into play when you're considering. when to buy, when to hold, when to sell a particular stock. And one of the things that I think that trips up investors most is the emotional side of holding, these stocks because you get attached to them, maybe they've made you a lot of money at one point. and you want to continue seeing that. So whether that's creed or ego or just hopefulness, whatever that may be, it can get you into trouble. the psychology of investing, really fascinates me, just from. Me working with clients and things of that nature and how you see people, change or make irrational decisions based off money. when an outside looking in, the obvious answer, isn't always the one that's chosen. every investor has that one stock that they can't sell or can't get rid of when they know they should. The one they check every week, hoping that it'll get back to the old glory days, but sometimes loyalty costs more than it's worth. And so there's a couple things or a few things to think about when you're making these emotional decisions. One. You should try your best to keep emotions out of your decisions as much as possible, because you can fall into one of these traps, right? So investor psychology is at play. People fall in love with their stocks because they've made them money before it becomes an identity. I was right about this company once, and I'll be right again, so their ego gets in the way. I'm going to be correct. You should never let your ego or your emotion get in the way. That stock does not care about what you think or about what you feel. Those people buying and selling that stock only care about what that stock is doing For them monetarily, right? Especially those institutional investors. another trap you can fall into is called the sunk cost fallacy. where you tell yourself, we've held this thing so long, so selling this would actually realize that loss. maybe that's exactly what you need. You need to realize that loss. Take what you have and go put it somewhere else to work that will work harder for you. Right? ego and nostalgia, especially true. With big names. So if you've invested in companies like Apple or Tesla or Google or companies, that are tied to your personal experiences, products that you use on a daily or weekly or monthly basis, You can easily. Become emotionally attached to these stocks because you're using them on a regular basis, or you recognize their names, because it's Apple or it's Tesla or whatever, right? And so we have to understand, hey, take the emotion out of it. Is this stock a good stock? And we'll talk about the things that we should be asking ourselves here in just a little bit. And then the last thing is opportunity cost. The hidden cost of staying in a lagging stock is missing out on other opportunities, right? So you're holding on to the stock that just can't quite recover for whatever number of reasons. The longer you hold onto that. The longer you're missing those other opportunities. Right. And so generally speaking, I would say that most people, should be utilizing ETFs, mutual funds, and being, be in a well diversified portfolio. But sometimes you have discretionary funds, you feel good about a stock, and you get lucky or you did well enough research that maybe it's not necessarily all luck. It's. That's some of the research and work that you've done. and then you get in a position where now this is a big part of my net worth. And so how do I, get out of this stock without wrecking, the value that I've built or the net worth that I've built from making this great decision, right, or getting lucky on this decision. So emotions are powerful, but big markets do not care about your emotions like I just said. So let's talk about fundamentals when the story underneath a company changes, even if the stock chart hasn't caught up to it yet. Right? So, so we've talked about the emotional side, right? There's, and I think this, the emotional side is the most important side, but. There is the fundamental side. What is the business actually doing under the hood? And these are the things that you should be looking at to help you make a decision about whether to buy, hold or sell, right? So business model deterioration. So is growth if you're picking growth stocks, is the growth slowing? Are there margins shrinking? Is there a loss of a competitive advantage, often easy to overlook if you're focused only on the price. So if you're only technically speaking, or looking at the technical side of things or just focused on the price, you can miss some of these. Key indicators that, hey, maybe I should get out of this stock. Right? management changes. So is there a new C-E-O-C-E-O leadership direction changes, whatever that may be, right? Industry shifts. So with AI is the big thing right now. there's tons of money going into ai. what if that shifts? What if, that money goes away? What if there's some sort of new innovation? Right? and You have to make sure that you're staying on top of this. Some of the classic examples are, think about blockbuster if you're of a certain age, right? So I'm an early nineties baby. I remember going to Blockbusters, getting my movies, getting my, video games and things of that nature. And then Netflix comes along, and then all these streaming services comes along and now. Blockbuster is no more. Right? that's a classic example. If you don't stay up with the times, if you don't see the market shifting, you can hold onto these stocks too long and deteriorate the earnings that you've made. another example would be the Peloton boom. During. COVI. Obviously everyone, was required to stay at home or chose to stay at home for an extended period of time. People still wanted to work out. They bought Pelotons, and as soon as you could go back to gyms and things of that nature, after the pandemic, Peloton busted because the demand went away. Every, either everyone had a Peloton already, or, people didn't wanna buy them anymore because of, the ability to go back to the gym. So why investors miss signs? So the biggest thing is, I think, is confirmation bias, only looking for information that supports their existing beliefs. So if you want. A reason for, you to hold on to a particular stock, you're going to find that reason, right? Just with anything else in politics, if there's something you wanna believe, you're gonna find confirmation to believe that in, in politics or whatever, right? anchoring bias, right? That would be the second thing. Focusing on the original price rather than the current value. So when you bought it, it was probably a good value, it shot up and now it may be overvalued. So you're focused on that original price or that original value and not what it currently is worth. these are some things that you should think about when you're holding onto a stock for a certain period of time. So if you wouldn't buy this stock today at its current price and fundamentals, it probably doesn't deserve a spot in your portfolio anymore. if you wouldn't buy it today, why are you holding onto it? Doesn't mean you necessarily need to sell. but it should certainly. Question. Hey, why am I holding this? Do I need to consider selling it? Things of that nature. So even when we know it's time to move on, taxes often become the excuse to not acting, but holding. To avoid taxes can quietly cost you more than the tax bill itself. I see this a lot in real estate, right? I've met with potential clients and things of that nature and they have, a reasonably large portfolio in, in real estate and they've done well, right? They, they bought maybe pre COVID or even. if they're old enough to purchase homes back in oh 8, 0 9, when the market crashed and they, they took an opportunity and bought houses, right? And now they're sitting on 3, 4, 5, 6, sometimes seven or$800,000 of equity, and they can sell this. and they're worried about taxes, which, yes, most people don't like giving the IRS money or more money than they, they certainly should, right? Everybody wants to minimize their tax bill if they can. but. To what, to what degree are you willing to hold onto that, right? So if we're talking about stock, if you're gonna hold onto that stock longer,'cause you don't wanna pay the 15% tax bill or the 20% tax bill, but that stock keeps going down and down. Like to me, having 85% of these gains and paying that 15% tax would probably be more worth it than losing 30 or 40% of the value of the whole entire stock, right? we have to consider. what are we doing here, right? Do we want, 85% of something or, 0% of nothing, right? or a hundred percent of nothing. and I'm not saying the stock would go to zero, but, you, get my drift here. Like taxes? Yes. While they're not fun to pay, sometimes, Having something in your hand is better than hoping that the stock will continue to increase, right? So the myth of tax paralysis, right? Many investors refuse to sell because they don't want to pay capital gains, but holding a declining position to avoid taxes often results in losing far more than just your tax bill, right? So you get bad news, bad earnings, whatever that may be for that particular holding. again, you could see a fairly large correction in a holding, and it may be larger than that tax bill that you would've paid. So a couple reasons you would hold for taxes, right? Maybe you're in a position where your income's gonna drop dramatically and you wouldn't pay the 20%, you would pay the 15%, or you wouldn't pay the 15%. You would pay 0% at capital gains. Then that might be a reason to hold for a tax reason, but. if your tax situation's not gonna change dramatically, and it's time to sell that po that position, sell that position, pay those taxes, get into something new, or use it for whatever you want it to use it for in the first place, whether that's buying a home or retirement or whatever that case may be. don't just hold on to it because you're scared to pay the taxes. You still have more money than you had before. Right. yes. Will you have to pay 15 or 20% on those capital gains? Yes. But you still have the 85% of that money, that you would've not, else, not, would've not had anyways if you hadn't invested in that stock. So just keep that in mind, right? Focus on after tax returns. So ask yourself, what's better paying 15% capital gains on a profit today, or losing 30% in value over the next year, right? So what I've been saying, so. Would you rather pay 15% on those capital gains or lose 30%? and so to me, I'd rather pay a little bit of taxes on those capital gains, have more money in my pocket, or more money to go, invest elsewhere versus losing that 30%, over the next year. some other things to consider tax smart reallocation. So use that tax loss harvesting to offset other gains. So maybe you did hit big on x, y, Z stock, but a B, C stock has not done well. You can sell that stock at a loss to help offset. those gains in that one that you won. So the X, Y, z, that is up quite a bit, So reinvest those proceeds into more diversified or income producing assets. So this is, this comes into play when you have, concentration of stocks, right? or a concentrated stock itself. So let's say you have x, y, Z stock, and it is 80% of your net worth is probably a good idea. To go ahead and sell some of that stock, reinvest that into a more diversified portfolio so that you spread that risk of loss over multiple companies versus that one company that is worth 80% of your net worth. because the last thing you want is it to be the next Enron. And now instead of it being 80% of your net worth, it is 0% of your net worth and you just lost 80% of your net worth. so consider, also we've been working with clients on this year. consider charitable giving strategies. So if it is money that you don't necessarily need, right? And you wanna offload some of these capital gains. You can donate appreciated stock to a donor advised fund, and you would avoid paying capital gains on that. So I just helped a client with this, last week. we sent over the last bit of stock to her donor advised fund. over this year she donated, let's call it$400,000 into her don, donor-advised fund that had about$250,000 worth of gains, right? she's invested for a long time. she's done well for herself and. She is in a position where she can gift that money to the donor-advised fund, continue giving to the charities that she already gives to, but she is going to offload those capital gains, over, she's gonna offload those capital gains and not have to pay those. that'll be good for our tax situation. Right. and then we also paired that with some Roth conversions and things of that nature. It's a good little situation for her. So if you are charitably inclined, if you have the means to do it, charitable giving strategy here would be donating, an appreciated stock to your donor-advised fund. Right? And so from a tax standpoint, that makes a lot of sense. Now, if you have 2, 3, 4,$500,000 worth of gains, and you're able to gift that to a donor advised fund, then, you theoretically could get rid of those gains. And not have to pay'em. there's some, there's a good tax play there as well. now sometimes the smartest sell decisions aren't about timing the market, they're about reclaiming control over your portfolio direction. So this is where we're gonna talk about action. What are some things that we should be thinking about when we're holding on to this particular stock? X, Y, Z, A, b, C, stock, whatever that may be for you. what should you be looking for? What questions should you be asking yourself, right? I wanna give action to this podcast. And so the first thing I would ask yourself, would I buy this stock today based on what I know now? And if you're telling yourself no, then maybe you should reconsider, holding onto that stock. There's other things that you should think about, but maybe you should start leaning towards selling that stock has the company story. Or fundamentals change? Has there been any big changes in the company, new CEOs, new visions, new changes in revenue, whether that be declining revenue, shrinking margins, the things that we talked about before. Number three are my reasons for holding the stock. Emotional or strategic, Often I find it's emotional, and if it's emotional, you should go ahead and sell it. And start to reallocate that to a risk tolerance and a portfolio that fits your goals and not just something that is, emotional and something you wanna hold onto.'cause at one point it was at a certain price or whatever. Number four is the position skewing my diversity or risk exposure. So this comes into play again with that concentrated stock. So if you have a stock that is. 60, 70, 80, 90% of your net worth that is skewing your diversification, right? So you're putting all your eggs essentially in one basket. and that is, investing 1 0 1. That's a no-no. and I'm not saying that you shouldn't have, a more concentrated exposure to the stock, right? you certainly could hold it. I'm not saying sell all of it. but if you have certain goals of like retirement or buying a new home or whatever, the number of things that you could have as far as the goal, if this. Particular holding went down 20, 30, 40%. Is that going to affect your ability to do those things? And if that's yes, then you need to take some of that stock and start diversifying it over, a more, broad spectrum of stocks, baskets of stocks, whether that be ETFs or, a basket of stocks, whatever that may be. Right. because. The end point. No one's ever come to me and said, oh, thank you, hunter. You got me a 10% return, or 30% return, whatever. Right? they are always thankful for, oh, I'm retiring, or, oh, I got to buy this house, or go on this vacation, or things of that nature, right? So if you're putting yourself in a position where you're holding such an amount of stock that. It's putting you at risk for some of the things that you want to accomplish in life, and you're probably holding too much of it, right? and so again, it probably has done well for you over time, but you should really ask yourself, what do I really want from the stock? Do I want just more of a return or do I want to be able to do certain things with the money that is going to come from the stock? Number five, could reallocating and improve my overall returns or reduce stress. So working with a client right now that I'm onboarding, and stress was a big factor. He had done well. He picked, a stock that he felt pretty good about in, adjacent to the AI industry, and it shot up, has done well, and he came to me, he's like. I've done well, I want to de-risk my portfolio, because it's stressing me out. I have a new job that I'm getting geared up for and I'm not gonna have time to do this, as much anymore. and so for a lot of people it is just to reduce the stress. It certainly can be stressful if you're looking at Google and it's 90% of your portfolio. And if Google tanks well, there goes my entire life, right? and so having, again, a well diversified portfolio or reallocating your portfolio or Google is a much smaller portion of your net worth or Apple or whatever, x, y, Z company, can reduce your stress from, just. Knowing that hey, Google isn't my whole, my whole life anymore. It is kind of over, multiple companies and things of that nature. So those are some things that you wanna look for. Again, would you buy the stock today based on the information that you know? has the company's story or fundamental changes, are there any reasons that you are holding it for emotional reasons or strategic? is there a position skewing your diversification or risk exposure, could you reallocate to improve your overall situation or reduce stress? Again, you don't have to torch the stock completely. Maybe it's just a trim where, you know, you don't have to sell a hundred percent at once. You could just sell in stages or just reduce your exposure to maybe 20% of your net worth. and then reallocate the rest, to a more diversified portfolio that fits your risk tolerance. How do I build a system for this? That's where a clear financial planning process, like the Palm Valley pathway really helps. Organize. So understand what you own, why you own it, optimize. Evaluate the performance and the tax impact, not just price history plan. Create a. Sell strategy that fits your biggest goals, retirement, charitable giving, diversification, principle protection, whatever that may be. And then action execute systematically, not emotionally. And that's the most key point to this is Execute systematically, not emotionally. I am working with a client that has hit big on a particular holding. I'm helping him, get rid of that holding. And so one of the things that he's having trouble with is emotionally he wants to stick with the stock and it is trading, not on its highs, but, pretty close to its highs as it stands right now as I'm recording and looking at it. And so he. Wants to sell at some point, but we have to have a conversation on what a good number is for him and when it hits that number, we're gonna sell. Right. not. an emotional decision is going to be a systematic decision. Hey, this is where I wanna be, this is where I wanna sell. It does not matter what that stock does moving forward after that decision. Right? I've worked with clients in the past where it was kind of the same situation, but on the downside, it, the stock had run up. It was a client of mine that had worked, for a tech company. And they received what's called RU, so restricted stock units. and they were vesting, right? And the stock units had become a very large portion of her net worth. And the stock had not been doing well. And I said, Hey, if we get a good earnings call and it bounces up, let's go ahead and sell at a particular price. they did not listen. let's say it was trading at one 40. Bounced up to one 70. We decided, weeks before that, Hey, we're gonna sell at one 70, right? it hit one 70. I gave'em a call, Hey, we should certainly sell, blah, blah, blah. they did not listen. that soc has since continued to decline over time. And so hopefully, if they're listening, they have sold at some point, and gotten out of it, and gotten what they can. because again, it was a significant amount of their net worth things of that nature. So I think selling it would've been. The best decision for them, but you can only do what you can do, right? And so they hold on it for emotional reasons and it has backfired. Whereas you need to have a systematic, you need to have rules. And when those rules hit, you need to sell. And I think that's where financial advisor can come in and help, is take that emotion out, be that third party to say, okay, we said. The stock needs to trade at two 30 or the stock needs to trade at one 70, whatever it is. And once you get there, hey, we are selling, we're getting out. and that's that. And we'll move on and we have a plan for what happens after we sell and all that, right? and so take the emotions out. And I think that's where the Palm Valley pathway can come into play or working with an advisor can come into play. so if you're unsure, maybe you're in a similar situation, you hit big on a stock, you're unsure, hey, what can I do? Maybe it's Bitcoin. Who knows? what do I do with all this money? how do I. Get out of this stock and preserve what I've built, for making this great decision or getting lucky on this decision. You can always go to my website, palm valley wm.com. I would love. To have a conversation with you about how do we take this wealth that I've grown from this particular holding, and turn it into things that I can actually do in my real life, whether that's buying a home, starting a business, retirement, whatever that may be, because at the end of the day, that's what it's about. It's not about taking, the stock that's trading at a hundred dollars and getting it to a thousand dollars. While that's sounds like a fun high score game, ultimately it's just gonna lead you to being unfulfilled. And so we want to take, hey, maybe that stock did hit a thousand and so how can we take that stock that's a thousand and turn it into real life things in your life that you can enjoy with your friends and family that you love doing, the hobbies and things that you love. That's, that's what I'm about here at Palm Valley. So again, if you're one of those people that are holding onto a stock too long, you've hit big but you don't know what to do, go to my website, Palm Valley wm.com, schedule a call with me and we can have a conversation about your situation, to help suit your needs and come up with a plan of action to, To help you out. So sometimes the hardest thing about investing isn't finding the next great opportunity is letting go of the one that used to be great. Remember, discipline beats nostalgia. Don't let your portfolio get stuck in the past when your goals are in the future. Love that quote. we'll see you in the next one. This podcast is for educational purposes only. Is not meant to be investment or financial planning advice. Do not make decisions solely based on this podcast alone. Please seek professional help when making decisions about your own situation. I.