How Do You Know When to Sell a Losing Stock?


  • Knowing when it’s the right time to sell a losing stock can be tricky. It’s important to not give in to the breakeven fallacy – there’s no guarantee that a losing stock will ever recover its price to what you paid for it.
  • At the same time, giving in to panic and emotions running rampant can cause investors to make poor decisions. As such, it’s important to implement a defensive strategy to mitigate the impact of your emotions.
  • Some of the best reasons to sell include:
    • The stock price has reached your stop-loss limit
    • It’s time to rebalance your portfolio
    • A capital loss will help your tax situation
    • You really, really need the cash
  • Regardless of why you’re selling, the important thing is to make sure you’re doing what’s right for you in the long-term.

The market will always perform – in theory, at least. We’ve seen this time and again: after the Great Depression; following the 2008 housing bubble burst; and most recently, the post-pandemic rebound that brought many stocks to all-time highs.

But just because the market will eventually recover doesn’t mean that an individual stock will. After all, there’s no guarantee of future success in any investment, just as there’s no guarantee of failure. And for most of us, there comes a point at which preserving capital is more important than recovering losses.

But knowing when to exit a losing position is tricky business, even for seasoned investors. As the saying goes, past performance is not a guarantee of future results. This is the investor’s never-ending struggle: knowing how to tell when you should sell a losing stock.

The Fallacy of Breaking Even

The breakeven fallacy is similar to the sunk-cost fallacy, wherein sinking effort or money into a situation makes a person reluctant to leave. The premise is similar in investing: once you buy a stock, it becomes difficult to back out for less than you paid. Instead of selling to limit losses, you might hope to “break even” by waiting out the downturn.

There is some merit to this line of thought; after all, small dips are common in even stable stocks. But when a stock consistently declines, it’s important to weigh the potential for losses against reinvesting the capital in more lucrative positions.

Additionally, you should consider that:

  • There’s no guarantee a stock will ever bounce back
  • Waiting to breakeven takes time, which ties up money and erodes returns
  • The more you lose, the more you have to recover

Let’s take a look at that last point. On its face, the premise sounds absurd – if you lose 50%, you only have to gain that 50% back, right?

But a simple chart comparison reveals the actual math:

Original Price Paid$ Loss% LossCurrent Value% to Break Even

As you can see, a stock that loses 50% of its price has to double its value to breakeven. And while rebounds happen, that’s a long way for any stock to climb in normal market conditions.

How to Know When to Sell a Losing Stock

Of course, stocks that dip dramatically – say, due to a global pandemic – may rise again quickly. But if you look at the last time the market crashed in the 2008 housing bubble, most securities took years to recover. And in that time, money left in stagnant or losing positions on hopes of “breaking even” could have been put to work in more profitable positions, instead.

That’s why it’s important to know when to sell a losing stock. While it’s possible to make generalizations – for instance, the longer your time horizon, the higher your risk tolerance may be – an investors’ age, style, and strategy may differ vastly.

As such, we’ve put together a list of reasons to help you determine when the best time is to sell for your sake – and no one else’s.

Your Defensive Strategy Says So

When you first start investing, it’s recommended that you set up a defensive strategy to prevent excess losses. By predetermining your plan of action, you can circumvent your emotional investment and reduce the urge to give into the breakeven fallacy.

If you haven’t yet designed your defensive strategy, there’s no time like the present! Make sure to account for factors like:

  • Your investment time horizon
  • How much of your portfolio you can afford to lose
  • Your investing style

And keep in mind that you can continually adjust your defensive strategy to account for your net worth, current market conditions, and your age.

The Stock Has Reached Your Stop-Loss Limit

Another common reason to sell a losing stock is that it has reached your stop-loss limit. This is a line that investors – especially traders – draw in the sand to limit their losses. Once an investment dips below a certain price or loses a certain percentage, your stop-loss order triggers an automatic sell-off to preserve your remaining capital.

While most brokers have this ability built in, you may want to monitor your investments and test your limits, as it were. You may find that on paper, you’re comfortable with 10% losses – but in practice, anything more than 5% makes your palms sweaty.

But remember: while it’s okay to change your mind about your tolerance and adapt to changing situations, it’s risky to make decisions based solely on your emotions. (We did mention that you should implement a predetermined defensive strategy, didn’t we?)

Your Investment Has Changed

Another reason to sell a losing stock is that the conditions of your purchase have changed. There’s nothing wrong with backing out of a position that doesn’t fit your goals and investment thesis. (In simple terms, your investment thesis is the reason you invest in a stock beyond “I want it to increase in price,” such as a solid balance sheet, history of increasing dividends, etc.)

To that end, when you’re considering exiting a position, ask yourself these questions:

  • Why did you invest in this particular stock?
  • Did something change in the market or company to cause a slip?
  • Does this change impact your decision to invest in the company?

If the answer to the last question is yes, it may be time to exit your position.

For instance, let’s say that you invested in AwesomeStock, Inc. because their past record of low debt and high profits fit with your fundamental strategy. Let’s then say that they buy out another company to the tune of $100 million in new debt, and subsequently their profits drop by 25%. As a result, their stock slips 2% per day for the better part of a week – and you need to know if you should get out or wait out.

In this instance, the company has breached your unofficial “terms and conditions.” At this point, you may be better served to cut your losses, rather than wait on hope that this once-perfect investment will realign with your thesis in the future.

There’s A Better Opportunity Elsewhere

Sometimes, the time to sell a losing stock is when another hot stock has lost even more.

For example, if you have a position in a declining industrial stock, but you see a lucrative opportunity in the tech industry, it may make sense to exit your industrial position and go in on tech. Short-term investor panic in otherwise profitable companies can make for excellent buying opportunities if you hop in at the right time.

And if you don’t just have the money sitting around – as most of us don’t – it can make sense to sell one losing stock to invest in another.

The Company is Acquiring or Being Acquired

AT&T’s recent announcement of their merger of WarnerMedia with Discovery has made this reason particularly poignant.

Often times, when a company is going through an acquisition phase, selling off its stock makes strategic sense as a way to cut your losses. Depending on the type of merger, the stock price may shift to the acquisition price, crash overnight (especially if the deal falls through), or lead to investors owning shares in a new company.

Any of these reasons are valid excuses for selling a losing stock and reinvesting the funds elsewhere for the time being.

Your Portfolio Is Off-Balance

As you age, your investment needs and goals will likely change with you as your risk tolerance evolves. Generally, the closer you are to retirement, the less risk you should take in your portfolio to mitigate the chances of a worst-case scenario.

For instance, in your 20s and 30s, investing in high-growth, high-risk funds such as emerging markets may make sense. But if you’re in your 50s with a large position in emerging markets, you may want to consider cutting back to a more reasonable level of risk.

As a rule, you should check your allocations once a year to ensure your portfolio aligns with your risk tolerance.

A Capital Loss Will Help Your Taxes

In some cases, taking advantage of tax-loss harvesting – selling your investment at a loss for tax purposes – makes sense, too.

For example, if you invest in a taxable account, the current tax code allows you to report up to $3,000 in capital losses annually, which lowers your taxable income. This can help you lower your income tax bill overall – and if you’re straddling two tax brackets, may even push you into the next-lowest tax rate.

Keep in mind that selling stocks for tax reasons has implications for your portfolio and income both. As such, it’s wise to consult with a tax professional to ensure you understand the potential ramifications.

You Really, Really Need the Cash

Sometimes, life happens. Whether you’re slapped with an unexpected medical bill, moving across the country, or suddenly responsible for a giant mortgage, there may come a day when you really, really need the cash. And if you’ve dipped into your savings and need to replenish your liquidity or have no savings left to speak of, it may be time to shed your underperforming investments.

(That said, keep in mind that selling off your positions to buy a brand-new car when your current model is only three years old may not be a wise investment decision.)

Sell When it Makes the Most Sense

Sometimes, a stock’s brief decline is just that: a quick blip in the long-term stock chart. Other times, it provides ample reason to exit your position and seek greener pastures elsewhere. At the end of the day, what’s important is ensuring that you invest – and sell – based on what’s right for you.

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