When markets perform well, the question of whether to sell and turn paper gains into cash will always pop up.
Friends and family may advise you to “take profit”, while news outlets warn of market peaks, intensifying the urge to lock in gains.
However, selling purely because prices have risen can derail long-term compounding.
Let us delve into when selling makes sense and when holding may be the smarter move.
Why Large Gains Create Emotional Pressure
After a strong rally, investors worry about giving back their profits if a correction hits.
Large gains on paper can feel great, but regret aversion makes investors sell “at the peak” to avoid feeling bad when these wins disappear later.
Instead of focusing on business fundamentals, people tend to anchor stock prices to recent highs and treat these as a reference point.
When prices fall from that high, it can feel as if something has gone wrong, even if nothing changed fundamentally.
Instead of evaluating long-term prospects and business fundamentals, investors react to short-term price movements and their discomfort, selling prematurely.
As a result, the decision to exit is often driven by emotional discomfort rather than financial logic.
The Case for Selling (When It Makes Sense)
However, this does not mean you should never sell.
Buying and selling are parts of investing, but you should know when selling is justified.
First, consider selling if the business has deteriorated structurally – weakened earnings, a shaky balance sheet, or a lost competitive edge.
Second, sell if the valuation has become excessive, with the share price far outstripping realistic growth.
Your portfolio might also become unbalanced, with one stock dominating the portfolio, increasing concentration risk.
Or there could be a need to adjust exposure due to changes in risk tolerance or life circumstances.
Alternatively, there could be better opportunities with improved risk-adjusted returns.
In such cases, selling and securing the profits is actually beneficial for your long-term investment plans.
The Case for Holding (Why Selling Too Early Can Hurt Returns)
Selling early jeopardises compounding.
The best long-term returns often come from quality holdings held for decades.
During the COVID-19 pandemic, DBS Group Holdings (SGX: D05) fell to S$15.35 on 23 March 2020.
Less than a year later, on 8 January 2021, it bounced back to the pre-pandemic share price of S$24.
Since then, DBS has maintained a consistent upward trend, leaving many early sellers behind.
Those who exited prematurely missed out on massive capital appreciation, with DBS DBS recently crossing a historic milestone of S$60 per share.
Furthermore, these investors forfeited a reliable income stream; at current levels, selling early would have cost an investor a 4.1% dividend yield on a much larger principal base.
Finding an equally strong replacement after selling a quality stock can also be challenging, especially when factoring in transaction costs and timing errors.
Questions Every Long-Term Investor Should Ask Before Selling
Before selling into a rally, ask yourself these questions:
- Are earnings still growing, and is cash flow healthy?
If earnings are growing and cash flow is healthy, selling might make you lose out on the business’s growth potential.
- Has the competitive advantage weakened?
If the company’s fundamentals remain intact and its competitive advantage isn’t weakened, high share prices now may not be a good reason to exit.
- Is the dividend sustainable and growing?
If the payout is growing, the business likely still has “legs”. Selling prematurely sacrifices future compounding income.
- Would I buy this stock again today?
If you wouldn’t touch the stock at current valuations, it may be time to trim the position.
- Does this position still fit my time horizon and risk tolerance?
This position might have made sense five years ago, but it may not align with your current situation.
Smarter Alternatives to “Sell Everything”
Rather than selling everything, there are smarter alternatives that can strengthen your portfolio instead.
Take part of the profits by trimming positions to rebalance risk.
This way, you lock in some gains while keeping invested in future upside.
Instead of reinvesting dividends into the same stock, you can redirect that cash into other opportunities, gradually reducing exposure while maintaining the core holding.
By rebalancing over time, you let portfolio allocation drift guide adjustments rather than short-term price movements.
Finally, a hold-and-monitor approach can be effective if fundamentals remain sound.
Staying invested while regularly reassessing fundamentals keeps you disciplined, without letting fear push you into an all-or-nothing move.
Common Mistakes Investors Make With Big Winners
Big winners often trigger some of the most costly investor mistakes.
A high stock price doesn’t automatically mean a stock is expensive – it might just be worth more now because the company is more profitable.
Selling simply because the price has gone up can be detrimental to your long-term portfolio.
Trying to time the market top is more about guesswork than skill.
Investors who attempt to exit “at the top” end up selling too early and watching strong businesses continue to grow without them.
Another mistake many investors make is replacing high-quality holdings with speculative ideas.
Chasing the next big thing rather than sticking with durable businesses that compound over time is a destructive move.
Lastly, many also let their fear override long-term plans.
It’s often not holding on to winners that hurts returns, but abandoning them for emotional reasons.
Get Smart: Know When Not To Sell
For long-term investors, knowing when not to sell is as important as knowing when to sell.
Selling should be driven by valuation, fundamentals, and portfolio balance, not emotions and fears.
Large capital gains are often signs of successful investing rather than problems that need fixing.
The world’s gotten unpredictable, but some Singapore companies have quietly kept thriving. You’ve probably seen them in your daily life. And yes, they’ve kept paying dividends through it all. Meet 5 resilient stocks built to navigate global storms. Get the free report here and see how they’ve done it.
Follow us on Facebook, Instagram and Telegram for the latest investing news and analyses!
Disclosure: Wenting A. does not own shares in any of the companies mentioned.
