It is a debate among investors as old as the stock market itself. How long should you hold stocks? The answer you receive will depend on the type of trader you are talking to. Some will say a few minutes, some will say a few days, and some will say forever. This will completely depend upon your investing style and how you approach the stock market. If we could all buy stocks and hold them forever, I’m sure we would. But different people have different circumstances, and different reasons for investing in the first place.
So is there a correct answer? Unfortunately not. If we could all predict the market and time our trades at the most profitable moment then we would all be millionaires. We have all missed out on gains because we sold a stock too soon. I am sure we have all also missed on taking profits by holding a stock for too long. If you are an active investor that manages your own portfolio, buying and selling stocks is a fine balancing act. To tackle this question, we must analyze multiple factors surrounding the trade. Let’s take a look at what some of those are.
There is actually just a small percentage of traders that would fit into a single investing style. Most of us are passive investors who will jump into a trade if the opportunity arises. There are those on either extreme of this though, and for those traders their style and philosophy will dictate how long they hold a stock. Investing style covers a wide spectrum, so don’t worry if you do not have a hard and fast rule about how long you hold onto a stock. You may also have different rules for different stocks. Most traders would agree that holding onto an S&P 500 ETF forever is a good investment. Others might be more aggressive and trade the ups and downs of growth stocks. Whatever the case may be, investing style usually plays a large part in determining when you sell a position.
This is a nicer way of saying, how much longer do you have left to invest? If you are lucky enough to start investing in your twenties, your investing horizon is decades. For some traders, they started to invest later on in life, so they will not have the benefit of decades of compounding. A lot of people hold their positions until they retire, and then live off the proceeds of selling stocks from their portfolio. Your age and investing style are usually correlated. When you let your portfolio compound over time, it has been historically proven that you will attain steady growth. If you don’t have that kind of time, then you might be looking to buy and sell positions a little more frequently to maximize on the profits.
You Need the Money
Sometimes life happens and you need to sell some stock to pay for an unexpected expense. It really is the reason why we invest in the first place isn’t it? Have you ever heard the saying, ‘money is made to be spent’? Well, money is also made by investing but at the end of the day it’s still just money. You should never feel bad if you need to sell some stock to pay for something. There could be an upcoming vacation or home repair or maybe your family needs a new car. Needing the money in your investment portfolio is nothing to be ashamed of. If you need to liquidate some stocks for quick cash it’s understandable!
The Investment Thesis Changes
Here’s an important one that a lot of traders overlook: the investment thesis of a stock changes. For some reason, people seem to think that companies do not really change over time. The reason why you bought stock in a company years ago, may have changed significantly now. Think about a company like Facebook (NASDAQ:FB). If you bought stock years ago at its IPO, you were investing in a growing social media giant. If you buy stock in Facebook today, you are investing in the future of the Metaverse. It’s the same company but the focus of it has completely changed. If a company’s performance is in decline and you no longer feel as confident in the stock, it’s perfectly fine to sell it.
A Company Catalyst
This sort of goes hand in hand with the last point, but I wanted to highlight this as an opportune way of selling a stock. Company catalysts happen all the time. The clearest example happens four times per year at the quarterly earnings report. I actually advise against trading around earnings calls as it is usually a volatile time and it is hard to predict the movement of a stock. There are other catalysts though and it really depends on the industry the stock is in. Electric vehicle companies provide monthly delivery numbers every month. In a more infrequent example, biotech companies have things like FDA approvals and clinical studies. If the stock you hold suddenly surges off of a company catalyst, there is never anything wrong with taking some profits on your trade!
There are so many different trading styles out there that it is difficult to fall into one single category. As I mentioned before, most traders are fluid. Sticking to hard and fast rules can often be detrimental, although there is something to be said for discipline. Let’s go over the three main types of trading styles, and just realize that these can often overlap each other.
Day traders can probably be categorized as the most aggressive form of trading. These traders quite literally trade a stock once or even several times in the same session. It is definitely a more advanced form of trading, and it usually utilizes some form of technical analysis. There is also a lot of ‘feeling out’ of the market, which really comes with experience. It goes without saying that day trading can be a volatile way of investing. As soon as you see some profits, you take those and live to see another day. Day trading has little to do with how the stock or company will perform in the long-run and entirely on how the market is viewing the stock today.
Swing traders are slightly less aggressive, although they can occasionally be day traders themselves. Instead of focussing on buying and selling a stock over a single session, swing traders hold the stock for a short period of time. Swing traders can also use technical analysis, but also rely on factors that aren’t as quantified. These can include social sentiment, momentum, and of course, company catalysts. A typical swing trade lasts anywhere from a few days to a few weeks, although extreme cases can last for several months or even quarters. Swing trading is generally considered to be less volatile than day trading.
I would say most investors fall into this latter category, with a bit of swing trading mixed in when it is convenient. Long-term investors are the typical buy and hold people who want to take advantage of compounding. They will often buy a position in a stock and hold it for years, if not decades. Long-term investors rarely care about the day to day volatility of a stock, and are more invested in the long-term success of the company. This is the fundamental way of investing: buy shares of good companies and hold them forever. Does it work? Most of the time, it does. The short-term gains are less spectacular than day trading or swing trading and the long-term compounding takes years. In terms of the stock market, this is the most predictable and steady source of long-term income from your investments.,
The conclusion is: there is no right answer. It may seem like taking the easy way out but it really is the truth. As I outlined, the duration of time you should hold stocks depends on a number of different factors. Most of them are personal, and investing is a very personal thing. There is no set timeline for selling a stock. To be honest, you will probably never be able to time the highs or lows of any stock. For 99% of us, long-term investing is the easiest way to compound our money over time. If you have the stomach for day trading or swing trading, the gains can be outrageous considering the short period of time. But if not, you will almost never be steered wrong by buying stock of good companies, and holding them forever.