Know When to Sell

It's important to think things through before buying a stock, but you need to think about when to sell it, too. Otherwise, you might end up holding onto a stinker for far too long.

Don't sell just because a stock or the market is falling, or you've heard some rumors about the company, or someone tells you to sell. Do consider selling:

• If you can't remember why you bought it in the first place.

• If you don't know what the company does or how it makes its money.

• If the reason you bought a stock is no longer valid. Maybe the CEO has changed, for example, or the company is moving in a new direction that doesn't seem too promising.

• If the stock has become significantly overvalued relative to your target price. If you bought shares of Boeing at $50 per share and it's now trading around $85, well above your target price of $65, you might sell. Consider the tax conse- quences, though. If you expect the stock to hit $100 in a few years, you might want to just hang on.

• If you find a much more attractive place to invest your money. If your calculations suggest that a holding is now fairly valued and another stock appears to be undervalued by 50 percent, you stand to gain more in the other stock. Again, consider tax effects.

• If a stock is your only holding. Portfolios should be diversified, but not too diversified. For many people, eight to 15 stocks is about right. If one holding grows to represent more than, say, 20 to 30 percent of your portfolio, consider selling some of it.

• If you'll need that money within a few years. Any greenbacks you'll need in three to five (or 10) years should be in a less volatile place than stocks, such as a money market fund or CD.

• If you're only hanging on for emotional reasons.