Knowing when to sell shares can be just as important as knowing when to buy. Making timely sell moves is more difficult than you might think.

While holding onto a winner or waiting for a rebound can feel comforting, these decisions can sometimes be more harmful than helpful.

So, how do you know it's time to let go of a stock? Let's see when the experts say to hit the sell button – and what not to do before making that final call.

A process to sell shares

The decision to sell shares is never easy. According to Joshua Derrington, CIO of Alvia Asset Partners, investors should use a clear process when deciding to unload stock or not.

Derrington suggests three potential scenarios when a sell call is warranted, as opined in The Australian Financial Review.

He says the first reason to sell a stock is when its original investment thesis has "played out."

For example, a company may have achieved its expected growth. Future returns might no longer justify holding the position. Says Derrington:

Take Novo Nordisk as an example. It was one of our standout holdings in 2023… By late 2023, the thesis had mostly played out. Sentiment had driven valuations well beyond what we considered reasonable, and the upside had all but evaporated.

We exited later in 2023, locking in strong gains.

The fund manager also recommends selling shares when the "risk-reward trade-off no longer stacks up".

According to Derrington, mining giant South32 Ltd (ASX: S32) was an example of this in recent years. The fundie exited its position in "early 2022":

While South32 had served us well, we recognised that its near-term growth catalysts were largely priced in, and the risk-reward equation had shifted… valuations no longer justified holding the position.

Since our exit, South32's share price has struggled to gain momentum, reflecting the very risks we sought to avoid.

Nothing wrong with being wrong to sell shares

The final piece of advice is admitting when the investment thesis was wrong in the first place.

Every investor occasionally backs the wrong horse. Even Warren Buffett has his run of errors, including "overpaying" for his position in food giant Kraft Heinz.

But holding onto a stock in the hope of a turnaround is rarely a sound strategy, according to Derrington. One culprit is "fear of missing out", or FOMO:

The fear of loss keeps investors tied to underperformers, hoping for a miraculous recovery to break even. But hope is not a strategy.

Instead, investors must ask themselves a critical question: If I didn't already own this stock, would I buy it today? If the answer is no, it's time to sell.

FOMO, on the other hand, causes investors to ride winners for too long… This can be managed by occasionally taking partial profits – locking in gains while maintaining exposure to future upside.

What not to do

The decision to sell shares isn't easy, sure, but it shouldn't be made on a whim, either. Outside of a process, broker Morgan Stanley says avoiding common mistakes is just as important as knowing when to sell.

It says to sidestep these traps to avoid any complex errors.

The first is to avoid "panic-selling" during downturns. The broker notes that selling into a "falling market" guarantees "you lock in your losses".

"If you wait years to get back in, you may never recover".

The remedy? Take a long-term approach to your investing. Markets are cyclical, and "downturns ultimately are temporary". Sage advice.

Morgan Stanley also says many people "overestimate their ability to judge a stock" based on share price levels.

This "anchoring" to recent history could be an issue because, well, as the old saying goes, "past performance is no guarantee of future results".

"Profiting from short-term trading is a lot more difficult in practice than it seems", the broker notes. I agree.

Foolish takeout

Knowing when to sell shares is also more difficult than it seems.

But common sense and a string of experts agree on a few things: It's about managing risks, having a process, and not being overly emotionally invested.

If you'd prefer not to worry about the ins and outs of selling stocks, you might want to explore an exchange-traded fund (ETF), which tracks the broader S&P/ASX 200 index (ASX: XJO) as a whole. Here, an external manager will take care of the 'portfolio' for a small expense, reducing the number of buy/sell decisions to just one — the ETF.