One of the biggest challenges of investing is knowing when to sell a stock.

If a stock is trading at a loss, we “hope” it climbs back up just so we can break even on the trade. And if it’s a big winner, we get scared of selling and losing out on future gains.

The emotional toll this takes can be overwhelming. It can paralyze us into taking no action.

Of course, in a perfect world, we could buy stocks and hold them “forever.” But for the vast majority of investors, buy-and-hold investing is problematic. The truth is, most of us simply don’t have the time, patience, or bankroll to sit on a holding for 20 years.

Besides, if the past couple of years have taught us anything, it’s that nobody really knows what the future holds.

Every company goes through ups and downs. And during those down cycles, we don’t know how long it will be until the firm turns it around — or even if it will turn things around.

How “Buy And Hold” Can End in Disaster

Just ask anyone who invested in Intel (NSDQ: INTC) back in 1999. A lot of investors probably thought they could buy this “safe,” solid blue-chip stock and hold it for years. Surely they’d come out ahead with little worry at all.

But after more than a decade, you can see how well the buy-and-hold strategy performed:

That’s a long time to have your money in a stock that went nowhere. And in this case, you would have still lost money.

More importantly, that’s a lot of time lost.

We can make up a 15%, 20%, or 30% loss, but we can’t make up for lost time.

So how do you know when it’s the right time to sell a holding?

Unfortunately, there are no perfect cookie-cutter answers. Everyone’s situation is different.

However, here are three scenarios in which it’s a good idea to sell or take some profits.

3 Scenarios in Which It May Be Time to Sell

1) Your Investment Thesis Changes

Do you remember why you bought the stock in the first place? Was it growing sales or earnings at a fast clip? Was it trading for cheap, with a lofty dividend, or thick margins? Does it dominate its market and gush cash flow? Typically, you buy a stock because you like it for one of these reasons.

Periodically check in with your holdings and remind yourself why you bought the stock and if those reasons hold true today. If you find that the firm’s fundamentals are deteriorating, figure out why. Is it a short-term problem or something that will persist longer? Are you willing to ride it out, or would you rather book your gains and put your money to work elsewhere?

One thing to remember is that you can always buy the stock back (assuming it hasn’t been acquired or gone bankrupt). Sometimes investors will sell a stock and then never go back to it because they’re mentally anchored to their original entry price. They see a stock they bought for $40, now trading for $150, and think it’s now too pricey because at one point they got it for a fraction of that.

Imagine if you thought about other things the same way. Take real estate, for example. Say you bought a house for $100,000 eight years ago and sold it for $350,000, making a tidy profit. But now when you look for a similar house, you think they are all overpriced because you bought that house for $100,000 years ago.

The point is this: Don’t get anchored to a price. The price is just a number. Ask, Is the price reflecting the value, or is it reflecting a discounted or inflated value? As Warren Buffett says, “Price is what you pay. Value is what you get.”

2) The Stock Hits a Stop Loss

I’m a big fan of using stop losses or trailing stops. This helps take some of the emotion out of the difficult sell process. Of course, using stop losses and executing on your stop losses are two very different stories. Many might “use” a stop loss, but not actually follow it and sell when it’s triggered.

But I digress…

Stop losses can be a wonderful tool that most investors should utilize. Of course, we have to use careful judgment when we have a black swan event like COVID-19 that crushes nearly every stock in the market in a quick amount of time.

But beyond these rare events, stop losses are a great tool to understand and employ. You can adjust your stop loss depending on your risk tolerance and the volatility of the stock. For example, on a small-cap stock that sees wild swings, you might use a 25%-30% stop loss (and smaller position size) than you might with a larger blue-chip stock like Intel.

If you’re wondering how you can find out the volatility of a stock, look up its beta. Beta is a measure of volatility, or risk, compared to the market as a whole. Beta is most commonly used in portfolio management, but you can find an individual stock’s beta on sites like Yahoo! Finance. A beta of 1 means it is as volatile as the overall market. A value greater than 1 means the stock is theoretically more volatile, while less than 1 is less volatile than the market.

3) The Stock’s Valuations Are Trading at Rich Premiums

This last tip is one of the more obvious scenarios in which you should sell. It can be a bit tricky to base a “sell” decision on valuation metrics alone. If the company backs up the lofty valuations with outstanding sales and earnings when it reports next, then those valuations might not seem so lofty.

But if you’re not feeling overly confident about the stock’s prospects, then it’s OK to book your profits (or cut your losses) or even trim back on the position a little. In other words, it’s OK to take some profits off the table.

After all, if we’re not constantly injecting cash into our brokerage account, then we need to raise cash somehow. Taking profits, or rebalancing the portfolio, is a great way to do that.

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