Answering this question depends on your investment goals, risk appetite and time horizon.
Example: Say, if your investment has been providing solid returns over time and suddenly there is news of poor performance from that same company, this could cause its share price to plummet and consequently your share investment to decline significantly.
Time horizon
Time horizon should always be taken into account when investing. It influences how much risk is appropriate and which investments meet your specific needs; typically, the longer the horizon, the higher your returns may be.
Saving for retirement provides more leeway in terms of taking on risk than needing the funds in a few years, since you will have time to ride out any market fluctuations and adjust.
Short-term investors should opt for liquid assets that can easily be converted to cash, such as savings accounts, money market funds and certificates of deposit. They should avoid investing in volatile assets which may lead to loss of their initial investment; rather choose more conservative investments like T-bills and low-risk bonds to reduce volatility and risk.
Risk appetite
Selecting an investment strategy that aligns with both your risk appetite and financial goals is essential to meeting them. Investors who cannot tolerate short-term losses may be tempted to sell during times of market instability, diminishing their chances of meeting their investing goals. Working with a financial advisor may help identify worthy risks that match both their risk appetite and goals more closely.
Investors with an elevated risk tolerance tend to be comfortable with the idea of losing some of their investments, typically selecting higher-risk options such as small company shares or emerging market debt. Furthermore, they typically possess both a long investment horizon and additional wealth which serves as an insurance against losses.
Your risk tolerance will likely evolve as you age and as your personal circumstances and investment goals shift, so it is crucial to regularly review your portfolio to ensure it fits with your risk tolerance and aligns with your investment goals. Working with an experienced financial adviser is also recommended in achieving optimal portfolio results.
Taxes
Tax considerations must always be kept in mind when deciding how long to hold onto stocks and bonds. When you sell investments at a profit, any profits earned will be taxed – this includes both selling price minus original investment as well as any tax rate paid depending on length of holding time and filing status. You may be able to reduce taxes through investing in retirement accounts or employing tax loss harvesting strategies which offset capital gains with losses.
Dividends are also considered taxable income, though typically taxed at lower rates than capital gains. Qualified dividends are subject to a flat 20% tax rate while nonqualified dividends may be taxed at ordinary income rates.
To maximize tax benefits, it is wise to purchase stocks you intend to hold for at least a year – that way you may qualify for lower long-term capital gains tax rates and use our tax calculator to determine how much this could save. In addition, consulting an accountant or other tax professional when making decisions about your portfolio could prove highly advantageous.
Trading
Retaining stocks for too long can be detrimental. If a stock has experienced substantial losses and cannot recover them, selling should be considered. Furthermore, it’s crucial to take note of tax implications when holding onto shares – the length of time can affect how much in taxes are due upon sale; an ideal holding period might be one year as this can reduce capital gains tax payments when selling your shares.
One common reason to sell stocks is to adjust your portfolio, whether due to lifestyle changes, unexpected expenses or too many assets in sectors that don’t match up with your goals. SmartAsset’s free tool connects you with financial advisors in your area who can assist in creating an individualized long-term strategy for holding and selling stocks – start now!
