Investing requires making tough decisions, but none as tough as deciding when to unload a stock.
"If it's done really well, it's like, when is it going to stop doing really well?" said Brian Bruce, director of the Finance Institute at Southern Methodist University's Cox School of Business. "You're so excited it's done well.
"If it's a stock that's down in price, it takes a lot of discipline to say: 'I've got to take 50 percent of my money off the table.' "
Selling also may mean owning up to an investment blunder.
"It's difficult because you're admitting that you made a mistake," Bruce said. "And if it's going up, you're worried that it's going to go up [more] and you say: 'Why did I take half of my money out? It just doubled again.' "
But knowing when to sell is essential to being a good investor because you want to ensure that you are getting the best return for your dollars.
Here are 10 questions to ask when deciding whether to sell a stock:
1. Do you have too much emotion wrapped up in a stock?
"If you want to be a successful investor, you have to separate yourself from the emotions," said John Zbesko, senior equity researcher at Schwab Equity Ratings at the Schwab Center for Financial Research. "The market doesn't care about your feelings."
So do not hang onto a stock just because you inherited it from grandma or its ticker symbol matches your initials.
2. Do the reasons you bought the stock still hold?
You cannot know when to sell a stock unless you know why you bought it.
"Think about the reasons why you thought the stock was attractive in the first place, and if those reasons are no longer true, then you should [consider selling]," Zbesko said.
3. Have the company's financial health and future prospects deteriorated?
This is the key question you need to ask.
Assess the reliability of the company's profits well into the future. Does it have sustainable competitive advantages, or can competitors easily horn in on its turf?
Is the company's debt increasing?
Growing debt is not necessarily bad if the company is profitable and it is using the money to invest in growth projects or buy back shares.
The key question is whether the company can pay its debts over the long term.
Are inventory levels rising? Make sure accounts receivable - money owed the company - and inventory are not growing faster than sales, as that suggests things are getting out of control.
But be careful of bailing just because a company misses earnings estimates.
"You're going to miss some earnings estimates," said William Reichenstein, an investments professor at Baylor University. You can overlook an occasional setback, he said, if the reasons you bought the stock are still valid.
4. Did you miss something when you first evaluated the company?
"Perhaps you thought management would be able to pull off a turnaround, but the task turned out to be bigger than you thought," Pat Dorsey, director of equity research at Morningstar Inc., wrote in an article.
"Or maybe you underestimated the strength of a company's competition, or overestimated its ability to find new growth opportunities," he said. "If your initial analysis was wrong, cut your losses and move on."
5. Has the stock become too large a part of your investment portfolio?
A fundamental tenet of investing is to diversify your holdings. You may want to consider selling if you are overloaded with a particular stock.
6. Is the stock soaring while earnings at the company aren't?
"By themselves, share-price movements convey no useful information, especially since prices can move in all sorts of directions in the short term for completely unfathomable reasons," Dorsey said.
How a stock performs in the future is largely based on the expected future cash flows of the company, so when you're making a sell decision, look to the future rather than the past.
7. Is the overall stock market rallying, but your stock is not?
Consider selling, especially if it is a stock that tends to move in sync with the market, but do not take that step before analyzing what is going on with the company.
8. Is there a better stock to buy?
"The decision whether or not to sell a stock boils down to one rule: Sell an existing holding if a superior stock is available," said Greg Forsythe, senior vice president of Schwab Equity Ratings.
Sell a stock if another that suits your risk tolerance and has more return potential - after subtracting any taxes and transaction costs - is available, he said.
9. Do you really need the money and have no other resources?
Stocks are long-term investments, so hold on to them if you can. But if you need the money, by all means sell.
In the future, however, if you expect you will need the money in fewer than five years, consider investing in a money market mutual fund, which has less volatility.
10. Have you hit your predefined pain threshold?