When to Sell That Really Great Stock You Have

Posted by: Joseph Kuo | June 28, 2023

For those of us who invest in the stock market, let’s admit it— we’d all love to find that next Google, Apple, or Tesla that will propel our investment portfolios to life changing amounts of wealth. 

We might also be fortunate enough to join a company that successfully achieves an IPO and then sees its stock continue to rise, giving our restricted stock units/stock options tremendous value. With either approach, as we see our investment account balances skyrocket, our wildest hopes and dreams seem within reach.

Why Selling That Great Stock (Diversifying) Is the Safe Move

Just about all financial advisors will advise against having your investment portfolio heavily weighted in a single stock. But to have such a chance to strike it rich, you have to go big and hold on to a large number of shares in said company.

When you hold a large number of shares in a particular stock, you put yourself at the mercy of company-specific risks. (You could mitigate the risk somehow by trading options. But doing so requires a large amount of upkeep and is not always allowed if you’re an employee of the company in question.) Regardless of how great the products are or how capable the management team is, circumstances outside of the company’s control can cause the investors to lose a lot of money. 

Events such as a negative social media post that goes viral, supply chain disruption, or poor financial performance by another company in a related sector can all cause a stock to plummet even though it still has great fundamentals. Having a diversified stock portfolio made up of many different stocks is the astute and far safer approach.

How I Work With Clients Who Have A Really Great Stock

When I talk with my clients about having a diversified stock portfolio, the first point I make is that the reason for diversification is to protect them against the risk of a large stock dropping in value. By diversifying our investment portfolio, we reduce risks from specific companies. If one company tanks, your other stocks can help to cushion the impact on your portfolio. Overall, the portfolio will still fluctuate due to economic conditions and public sentiment, but the risks are minimized.

This approach is common sense, logical, and sensible. However, I understand that in order to “strike it rich”, you are bound to have to take some risks. This risk can take the form of putting a lot of money into one stock, or in deciding to leave a high paying job at a stable corporation for a lower paying job at a startup that offers substantial stock options. 

I also understand that the preference to hold on to such a stock is often emotional, especially if the client works at the company in question. If the client still believes in the company’s long term success, they are likely to be hesitant about selling now for fear of losing out on any potential future gains. There’s also the idea that selling is a sign that they no longer believe in the company. 

On the other hand, by engaging with me the client does have some level of desire to do something about the stock. But as a financial life planner, instead of just saying “you should diversify”, my approach is to come up with a plan that will protect my clients while also giving them a chance to realize their dreams. So before I give any advice I will first try to gain some deeper insight into my clients’ thought process. 

Risk Capacity

Why is the client choosing to take this risk? Is there a major financial goal they’re hoping to realize by holding on to the stock longer and letting it gain a little more? Conversely, might that goal, or some version of it, have been accomplished already?

If the answer to the latter question is yes, then it makes sense to cash in on the stock now. If there is another financial goal to be unlocked by the stock’s further gain, then we can set some parameters to sell or hold. 

If there’s an emotional reason to hold the stock, perhaps holding on to a smaller number of shares would satisfy that requirement. 

If the client is not sure, I can generate specific scenarios to show them the potential outcomes. 

Time Horizon

I’ll ask my client: if their chosen stock were to drop, how long would they be able to wait for it to come back up? If they won’t need the money for a long time, perhaps it might make sense to hold on to the stock. But if they’re hoping to retire in five years or make a major purchase later this year, then a “shorter leash” on the stock would be preferable.

Stress Level

Is it worth the effort and stress for the client of tracking/worrying about it daily or regularly? How much more would the client gain from this effort? Or is there a subconscious desire to be able to follow a stock on a daily basis? As a financial life planner I can manage the stock for the client and sell only at predetermined price levels. We can also set aside a certain percentage of the stock for the client to follow on their own, while I manage the rest.

Stock Picking: It’s A Two Step Decision

In the end, picking the right stock is a two part decision. Buying a stock that turns out to be the best performing stock of all time matters little if you don’t convert it into actual money to use. The second part of that great decision is being able to let go of the stock and actually see the money in your bank account. Aside from hedging their risk by diversification, this is the second major point I try to impart upon my clients.