Often it isn’t easy to sell a stock, whether you’re flying in the profits or in the red like a submarine beneath the sea. There unfortunately isn’t an easy formula or a one-size-fits-all solution to the situation. Still, we a have 3 rules that we think might help you out:

1. A better investment option

Always have alternate investment options. For example if you think your stocks or the market at large is overvalued then look at short-term (1-year till maturity) government/corporate debt as alternate options and vise versa. Further, don’t ever forget about more conservative investments such as money markets, CD accounts, etc. They may not be glamorous but at least you know where your money is and what type of clear risk you’re currently taking on.

Don’t hold an investment blindly that you think is overvalued or above your fair value just because it continues going up, you don’t know where else to put the freed up money, and or because of tax fears. Most will tell you it generally hurts more to see your investments start losing substantial value in the market rather than locking profits and getting hit with capital gains taxes a year later.

As well, taxes on investments aren’t something you can escape completely 100% forever even if you die. In the case that the tax implications are genuinely “huge” then you should have a financial team consisting of CPA’s, investment advisors, tax attorneys, and more helping you minimize the tax implications along with helping manage the empire.

2. Valuation

Before you ever buy a stock figure out the fair value of a stock is. Everyone has different strategies for this but the point is to have a hard number before placing a trade/investment. If you really want to take out the psychology of closing out a position place a limit order for example at the “fair value number” soon as you enter into it. This is about as simple and easy as it gets in our opinion.

3. A fundamental change in your thesis of the business

There is always the potential for change in a company and it happens all the time. When this happens ask, “Does this help or hurt my fundamental thesis for the company?” If it helps then the stock should increase in value. If it hurts your fundamental thesis then figure out what the “new” fair value of the company is and then see if the current stock price is below it or above it. If the “new” fair value is above the current stock price then figure out if this was a major or minor setback. If it’s minor and the “new” fair value is above have patience and hold to your guns if you feel comfortable.

If it’s a major blunder to your fundamental thesis and or your “new” fair value comes out below the current stock price cut it upon principle. There are plenty of “companies in the sea” and the objective of investing is to increase the value of your assets not to brag about catching a hot stock. Now the stock may keep going up but the point is to have objective investment rules in order to be a disciplined investor who isn’t influenced by stock price movements. Warren Buffett missed plenty of tech stocks in the 1990’s and he’s still one of the top investors in the world.

Remember, if you’re holding investments you believe are overvalued all you’re doing is playing chicken with the market and let’s face it the market has no fear because it has nothing to lose unlike you. Whether your holding broad index ETF’s (ex. IYY or IVV), tech stocks (ex. GOOG or APPL), and or anything else the rules should never change. When you start making exceptions for a certain investment that’s when the birth of a future issue starts.

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